The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of December 31, 2020, more than $4.6 trillion was invested in assets tied to the performance of the index.
The S&P 500 index is a free-float weighted/capitalization-weighted index and the 10 largest companies in the index account for 26.4% of the market capitalization of the index. The 10 largest companies in the index, in order of weighting, are Apple Inc., Microsoft, Alphabet Inc. (counting both class A & C shares), Amazon.com, Facebook, Tesla, Inc., Berkshire Hathaway, JPMorgan Chase & Co., and Johnson & Johnson. For a list of the components of the index, see List of S&P 500 companies. The components that have increased their dividends in 25 consecutive years are known as the S&P 500 Dividend Aristocrats.
S&P 500 Sectors
The leading sector in S&P 500 companies is Consumer Discretionary. Consumer Discretionary products are luxury items or services that are not necessary for survival. The demand for these items depends on economic conditions and the wealth of individuals. Products include cars, jewelry, sporting goods, and electronic devices. Luxury experiences include trips, stays at hotels, or dining in a posh restaurant. Most companies in this sector are easily recognized. Some examples include Starbucks, Best Buy, and Amazon.
S&P Dividend Yield
During the 90 years between 1871 and 1960, the S&P 500 annual dividend yield never fell below 3%. In fact, annual dividends reached above 5% during 45 separate years over the period. Of the 30 years after 1960, only five saw yields below 3%. The sharp change in S&P 500 dividend yield traces back to the early to mid-1990s. For example, the average dividend yield between 1970 and 1990 was 4.03%. It declined to 1.90% between 1991 and 2007. After a brief climb to 3.11% during the peak of the Great Recession of 2008, the annual S&P 500 dividend yield averaged just 1.97% between 2009 and 2019.
S&P 500 Market Capitalizations
By design, the S&P 500 includes only large companies. Only the biggest companies with massive market capitalizations ($9.8 billion or more) are included—think of large firms such as Apple, Microsoft, Amazon.com, Facebook, and Alphabet, the parent company of Google.2 One could argue that the S&P 500 is 100% weighted toward large-cap firms, though many of the biggest firms would technically be considered mega-cap.
Investing in the S&P 500 through a low-cost index fund can provide a very strong base for most stock portfolios. But to get broad diversification among market caps and sectors, it may help to expand your reach.
Fortunately, there are mutual funds and exchange-traded funds (ETFs) that provide exposure to whatever you may be seeking. An investor who is looking to boost their portfolio by purchasing small-cap stocks can buy shares of an index fund designed to mirror the Russell 2000. If you want to invest more in financial stocks, you can access funds comprising a wide range of banks and financial services firms.
There are also mutual funds and ETFs that offer broad exposure to the entire stock market, including all market caps and sectors. Vanguard’s Total Stock Market ETF and the S&P Total Stock Market ETF from iShares are two popular examples.