If you’re young and looking to build wealth, you may not care about dividends. After all, the cash distributions companies pay to shareholders are often seen as a way for retirees to earn some extra income from their portfolio.

But if you’re invested broadly in the U.S. stock market, dividends may be doing more heavy lifting than you think when it comes to boosting your bottom line.

Consider the historical returns of the S&P 500. From 1960 through 2024, a $10,000 investment in the index would have grown to more than $982,000 based solely on the upward trajectory in stock prices, according to a CNBC analysis of data from FactSet and NYU Stern.

But all the while, many of those companies were distributing cash to shareholders. If an investor during that period had reinvested that cash — as many investors do — they’d start 2025 with $6.42 million.

Going back to 1960, compounding growth of reinvested dividends has accounted for 85% of the S&P 500’s total return, according to Hartford Funds.

It’s easy, then, to see why some investors make dividends a focal point of their portfolios.

“There’s some comfort you can get by homing in on those [dividend-paying] companies,” says Brian Bollinger, founder of Simply Safe Dividends. And for younger investors, he adds, you can “make a really long-term focused dividend growth portfolio that’s optimized more for long-term capital appreciation and total return.”

As the data implies, if you own an S&P 500 fund or similar broad market index fund, you already have dividends working for you. And if you want to add an extra dividend component to your portfolio, there are plenty of mutual funds and exchange-traded funds that allow investors to take advantage of dividend strategies.

A quick refresher on how dividends work. Profitable companies have a choice of what to do with their excess cash. Some growth-focused firms may elect to reinvest it all back into the business, say by opening new locations or funding product research.

Many financially mature firms choose to distribute some of that money back to shareholders as a sort of token of gratitude. These regular cash payments are dividends, and if you’re invested in a broad stock index, chances are you’re already getting them.

To quantify a stock’s dividend, investors look to the dividend yield — a calculation which divides the amount of cash you receive in a year, per share, by the stock’s price. If you owned a stock worth $100 and received quarterly payments of $0.25, you’d divide your $1 annual payout by $100 for a 1% yield.

The S&P 500 currently does a little better than that, with a yield of about 1.3%.

That means, for every $1,000 in your S&P 500 ETF, you’re getting about $13 a year deposited into your brokerage account in cash. Reinvest that back into the fund you own, and congratulations, you’re taking advantage of the compounding mentioned above.

If you want to increase your portfolio’s dividend exposure, you can add a mutual fund or ETF that focuses on dividends, which tend to come in one of two basic flavors.

1. Dividend growth

These funds typically focus on companies that have increased the value of their payout on a yearly basis over a certain period of time. The thinking here is that companies that have a long track record of boosting their dividends are likely to continue doing so in the future.

“It’s not guaranteed,” says Todd Rosenbluth, head of research at TMX VettaFi. “But they’re more likely to do so because it’s part of their ethos.”

Funds that follow the S&P 500 Dividend Aristocrats Index, for instance, will invest in companies that have raised their payout for at least 25 consecutive years. A fund following the S&P 500 Dividend Growers Index would require 10 years of growth.

These funds will prominently feature what investors call high-quality, or even blue-chip stocks, says Dan Sotiroff, a senior manager research analyst at Morningstar. “Those are usually the types of companies that have really stable balance sheets. They’re consistently profitable year over year,” he says.

2. Equity income

Rather than focusing on growing payouts, equity income funds look to own stocks with high yields.

“This is what a lot of people think of when they think of dividend funds, and that’s dividend income,” says Sotiroff. “It’s where you see a lot of retirees because they want a regular payment.”

Funds that track the FTSE High Dividend Yield Index, for instance, yield 2.6% — double what you’d get with the S&P.

You’re unlikely to get dynamic price appreciation from these funds, says Rosenbluth. That’s because they tend to be concentrated in slower-growing sectors that traditionally hold up well when markets decline, such as consumer staples and utilities.

“With a yield-focused strategy, you tend to get a bit more exposure to some of those defensive sectors,” he says.

The FTSE index, for instance, has its heaviest weighting — 23% — in financial stocks, compared with a 10% holding in tech firms.

Whether you favor one style of dividend fund or the other comes down to your goals as an investor, says Rosenbluth.

“Investors need to decide whether they want some dividend income to add to the capital appreciation upside for the total return, or are they looking for dividends to be more of an income generator where the capital appreciation is less meaningful?” he says.

If it’s the former, opt to add a dividend growth fund to your core portfolio, he says. If it’s the latter, choose a high-yield strategy.

But make sure you look under the hood. Even though two funds may be branded the same way, they could have very different holdings once you dig into their portfolio strategies.

“One fund’s technology stocks might be Broadcom and Microsoft, another’s might be IBM,” he says. “There’s nothing wrong with either. Check the fund website and holdings to make sure it’s something you want to hold.”

And keep in mind, financial pros recommend against making any wholesale changes to your portfolio in order to pursue a dividend strategy. You can always ask a trusted financial advisor to help steer you in the right direction.

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