Friday, March 7, 2014

S&P 500 Dividend Yields Near Lows

S&P 500 yield

Saw this chart online, thought it was interesting.

Note that S&P 500 yield has been in a downtrend since 1981, though it formed a low during the boom in 1999 and has rebounded a bit since. Were one to fit a curve, it likely would lie at about 3%, which is where the yield began in the 1960s. One may surmise that the 3% yield rate thus is the "natural" nominal yield, which is distorted by outside factors.

All interest rates were outrageously high in 1981. That depressed the stock market and drove up yields. 1982 is when the stock market took off on its epic bull run and steadily drove down the yield.

Conversely, the stock market became outrageously overbought in 1999, and that drove yields down to epic lows. It was not so much a factor of competing interest rates as simply a stock market bubble which was native to stocks themselves. The 1999 bubble was the culmination of factors that had been in play since 1981, a "blow-off top" that the market has been working off since 1999.

Interesting to see how slowly trends manifest them in the stock market. The trend shown has been in place since the beginning of the Reagan administration.

What this chart doesn't show is the S&P 500 yield versus competing instruments. That would reveal that the S&P 500 yield in 1981 was worse than short-term alternatives in 1981, but better now. Heck, in 1981 you could still put your money in a bank passbook savings account and get an automatic 5%. Try finding anything like that today.

This chart is thus a reflection of any number of very complicated things that involve interest rates and inflation and the strength of the US Dollar. Seen in that light, the yield in the S&P 500 actually has increased in relative value over that time.

Looking ahead, the recent decline in yield is merely a normal statistical blip, but it does suggest that stock prices are moving just a tad ahead of the underlying valuations. Were the Fed to ease up on rates and allow them to rise, money would flow out of the stock market, the S&P 500 yield would rise, and the counter-trend in place since 1999 which has been artificially depressed by the Fed's low-interest rate policy and various QE programs would flourish.