This post graphs currency markets dividend yields since 1900 and demonstrates they are in historically low levels. Since the price/dividend percentage is the inverse of dividend produce, valuations based upon p/d ratio are in an all-time high. Historically expensive marketplaces such as these have produced disappointing long-term profits. I’ve argued somewhere else that valuation is important — it is important never overpay for investments. A common basis for valuation is earnings; investors determine how expensive the market is based upon how much you have to pay for one buck of cash flow — the purchase price / earnings proportion.
In this blog, I refine that a bit and appearance at normalized price/cash flow ratios. However, this is not the only way to assess valuation. Another popular valuation metric is the price/dividend proportion — how much must a buyer to purchase one dollar of dividends (or, conversely, what is the investor’s dividend yield)?
- 100 Years of U.S. Inflation Rate History: graph of yearly inflation since 1900, with debate
- Swachh Bharat Kosh (applicable from FY 2014-15)
- 1972 Defensible Space. New York: Macmillan
- Things Will Make You Money – Number 8 8: Be Yourself
- Perpetual Care (Cemetery) Trusts
- Betterment: Best robo-adviser
What’s Going On Here? Is 30 the New 10? Viewed from the dividend produce perspective, the email address details are troubling similarly. The above-mentioned chart (click to expand) shows the 100-year history of the Dow’s dividend yield. 70.71. Remember, this is actually the inverse of the price/dividend ratio exactly. For much of the last 100 years, the dividend yield ranged from 3-3.5% on the low end, to 10-11% on the high end. Readings in the 3-3.5% range were historically associated with bad final results.
However, within the last twenty years, 3-3.5% has been similar to a ceiling than a floor. Since price/dividend ratios have been high extraordinarily, it comes after that dividend yields have been extraordinarily low — the cheapest in the background. At year-end 1999 the dividend yield reached an all time year-end closing low of 1 1.5%!
I don’t brain stating this makes me a little nervous. This is not good news clearly but might not be quite as bad as it seems. Today’s investors supposedly prefer capital gains to dividends since capital gains get a more favorable tax treatment. In response Partially, companies have reduced their focus on dividends significantly within the last quarter-century. However, historically the dividend contribution to long-term currency market’s returns has been critical.
Unless the reduction in dividends is offset by higher revenue growth rates or further raises in price/dividend ratios (gasp!) long-term earnings are affected. Note: The above mentioned chart is dependant on DJIA (Dow Jones Industrial Average) data from my CURRENCY MARKETS Analysis Model. Results would be equivalent if we used S&P 500 data. Dow dividends prior to 1929 have been estimated based on another stock market index. The Dividend Contribution to 50-Year Total Return shows the historical importance of dividends on 50-calendar year comes back. The Dividend Contribution to 10-Year Total Return shows the historical need for dividends on 10-year returns.