Dividends and capital appreciation: Understanding total return

Key takeaways

• Dividends have historically played a key role in total return, offering income, reinvestment potential, and portfolio stability potential.
• Capital appreciation is often the primary driver of long-term returns for growth-focused strategies like those tracking the Nasdaq-100.
• Understanding investment goals—whether income, growth, or both—is important when selecting ETFs to match risk tolerance and financial plans.

Dividends have long been seen as a hallmark of disciplined, stable investing. For many investors—especially those seeking income or potentially reduced volatility—they remain a core part of the portfolio. But dividends are just one piece of the puzzle when it comes to total return. Capital appreciation—the increase in a stock or ETF’s value over time—can be just as or more important, depending on an investor’s particular goals.

Understanding how dividends and capital appreciation work together is key to making informed investment decisions. And when looking at growth-oriented strategies like Invesco QQQ, which tracks the Nasdaq-100® Index, it’s important to know where the emphasis lies.

A brief history of dividends

Dividend investing has deep roots in market history. For decades, steady dividend payers—typically large, profitable companies—were seen as core holdings, valued not just for price appreciation but for the income they delivered. Of course, dividends aren’t guaranteed. They can be cut or even eliminated if a company falls on hard times.

Looking at the long-term performance of the S&P 500 Index, dividend income accounted for 24% of the S&P 500's average monthly total return from 1957 to May 2025.¹ The percentage of total return derived from dividends can vary, though, from decade to decade. Recent market leadership in technology and innovation-driven sectors, has led to dividends accounting for a lower proportion of total return. In the 10 years ending May 31, 2025, 23% of the S&P 500’s total return can be attributable to dividend reinvestment compared to 35% a decade earlier.²

Why some investors like dividend-focused strategies

There are several reasons dividend-paying stocks and dividend-focused ETFs remain popular:

• Income generation: Particularly for retirees or income-focused investors, dividends provide a tangible cash flow without the need to sell holdings. This can be particularly helpful when interest rates and bond yields are low.
• Reinvestment power: Dividends can be reinvested automatically to buy more shares, potentially compounding returns over time.
• Stability: Companies that consistently pay and grow dividends are often seen as financially healthy and resilient during market downturns.

Dividend-focused ETFs cater to this demand, offering diversified exposure to companies with consistent payout histories.

Capital appreciation: The growth engine behind total return

While dividends provide a stream of income, capital appreciation is typically the engine behind wealth-building in growth-oriented strategies. This is especially true for indexes like the Nasdaq-100, which tend to include companies that reinvest earnings into research, innovation, and expansion rather than paying high dividends.³

Over time, this reinvestment has often translated into strong price performance. Many Nasdaq-100 constituents—such as Apple, Microsoft, and NVIDIA—do pay dividends, but their long-term returns have primarily come from stock price appreciation, fueled by growth in earnings and market leadership.⁴

How QQQ fits in: Growth over income

Invesco QQQ ETF, which tracks the Nasdaq-100, includes several dividend-paying companies—but it is not a dividend-focused strategy. Instead, it offers access to 100 of the largest non-financial companies listed on the Nasdaq, spanning sectors like technology, communication services, and consumer discretionary.

QQQ’s historical performance has been driven largely by capital appreciation, reflecting the growth characteristics of its underlying companies. For investors seeking exposure to innovation and long-term potential, QQQ may align more with a growth-oriented strategy than with income generation.

That said, dividends still play a supporting role in total return—just not the starring one.

Dividends can also be a sign of fundamental strength. For example, Invesco QQQ’s track record of compound annual growth in dividends over the past 10 years may indicate the fundamental strength and financial growth of many of its holding companies.

Know the rationale behind investment decisions

Some investors are more focused on dividends while others seek capital appreciation. There is also the middle road of seeking total return through a blend of both.

• Dividends can be a tool for generating income, helping to add stability, and supporting long-term compounding.
• Capital appreciation, especially in innovation-led companies, may offer greater upside—though often with higher volatility.
• Total return blends both, but understanding which component is driving your strategy is essential.

Whether investors prioritize income, growth, or a combination of the two, aligning their ETF selections with their financial goals—and risk tolerance—is what ultimately matters. Dividend-paying ETFs and growth-oriented strategies like Invesco QQQ can both play important roles in a diversified portfolio.