Annual Dividend Index Futures for the Russell 2000 of small-cap companies have consistently underpriced realized dividends since their launch in 2022 (Figure 2).  The same is largely true for the Nasdaq 100, although its Annual Dividend Index Futures underestimated 2025 realized payments in late 2024 (Figures 2 and 3).

This quirk of under-pricing realized dividends is interesting as we look to the future.  Annual dividend index futures on the S&P 500, Russell 2000 and Nasdaq 100 are currently pricing a remarkably pessimistic scenario for equity markets that are trading near record highs in price terms and are at historically high valuation levels, at least in the case of the tech-heavy Nasdaq 100 and S&P 500 (Figure 4). 

If trading near record highs and at high levels of valuation suggests financial optimism about the future, it’s not apparent from dividend index futures. In the case of the S&P 500, investors in the dividend futures market are currently pricing only modest nominal growth in dividends and negative real growth when adjusted for inflation by using the break-even spread between standard U.S. Treasuries and Treasury Inflation Protected Securities (TIPS) (Figure 5).

For Nasdaq 100 Annual Dividend Index Futures, the story is bittersweet: there are modest implied expectations for nominal dividend growth, but they are significantly below the recent trend and dividends are flat when adjusted for inflation (Figure 6).  Meanwhile, Russell 2000 Annual Dividend Index Futures imply modest growth for 2026, but outright declines in both nominal and real terms in subsequent years (Figure 7).      In a nutshell, it’s difficult to reconcile the enthusiasm with which investors have rallied equities to record highs of late with their pessimistic pricing of the dividend futures market. Both cannot simultaneously be correct.

But what about macroeconomics? Is there a macroeconomic argument for slow growth in dividends going forward?  From a macro perspective, dividends should follow this formula: Aggregate Dividends = (Nominal GDP) x (Corporate profits share of GDP) x (The Dividend Payout Ratio).  

When it comes to nominal GDP, there are reasons for both optimism and pessimism.  Nominal GDP growth can be segmented into two parts: real GDP growth and inflation. When it comes to real GDP, it might be difficult for the U.S. to achieve above-trend growth given that unemployment rates remain near historic lows. Unlike the 2010s which began with 10% unemployment and finished with an unemployment rate of 3.5% and simultaneously featured spectacular dividend growth (Figure 8).

On the optimistic side, labor productivity has begun to improve and, with the help of generative AI, might achieve growth rates akin to those of 1997 to 2012 when it was growing at nearly 3% per year (Figure 9).  Optimism over Gen AI is one of the major reasons why stock indices are at record highs. It is worth pointing out that S&P 500 dividend growth from 1997 to 2012 wasn’t especially robust as seen in      figure 5. Neither for that matter were the price returns of equities, which changed  little over the period and had two of the deepest bear markets since the Great Depression. In fact, the late 1990s saw sustained economic expansion amid the internet boom that, however, didn’t lead to explosive growth in dividends until the 2010s. 

The same is true for nearly every major economy outside of mainland China, Sweden and Switzerland (Figure 10).  Higher inflation might argue for faster growth in dividend payments, which we will analyse in a future paper.

The corporate profit share of GDP has grown significantly over time from 5-6% in the early 1990s to 10-11.5% in recent years. Currently, it is close to a record high of around 11.5% for after-tax corporate profits (Figure 11). This may make it difficult to boost dividends in the future: if corporate profits fall back, dividend payments could stabilize near current levels or even shrink as they did in recession years like 2001, 2008, 2009 and 2020. That said, if investors expect corporate profits to slide over time, why are they pricing stocks at record levels?

One possible answer could come in the payout ratio. When companies distribute cash to shareholders, they have a choice: they can either pay dividends, or they can buy back shares. Their preference depends in part on tax treatment. Prior to the U.S. lowering the dividend tax rate in 2003, dividend payouts were in decline. Since then, dividend payout ratios for companies in the S&P 500, S&P 400 Midcap and Russell 2000 as a percentage of total corporate profits have stabilized at around 20%, +/-5% of aggregate U.S. corporate profits (Figure 12). That said, share buybacks have existed for decades and their continued existence should not greatly influence the anticipated growth for dividends barring changes to their relative tax treatment.

In fact, if there was an economic downturn, companies typically slash buybacks and preserve dividends.  

Ultimately, the persistent discount observed in annual dividend index futures may reveal less about the long-term health of the U.S. economy and more about the structural mechanics of the equity derivatives market. While record-high valuations suggest a robust appetite for future growth, the dividend curve remains anchored by the hedging requirements of structured product desks and market makers. This imbalance creates a unique 'dividend risk premium'—a gap where realized payouts consistently outperform market expectations. For the disciplined investor, this disconnect offers a compelling relative-value opportunity: the chance to capture the underlying yield of the S&P 500, Nasdaq 100, or Russell 2000 at a price that seems to ignore the very optimism driving the cash indices to new heights.