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Price Dividend Ratio Offers Lessons From History at Trader’s Narrative

In Why The Price Dividend Ratio Is Better Than PE Ratio I argued that the lesser ratio based on dividends offers more insight. Here’s a follow up with an interactive long term chart.

It contains a massive amount of information so it can take a while to load… be patient, it is worth it. Not only does it show the historic ratio, it is interactive so you can zoom in on a shorter time frame by using the slider at the bottom:

The data is from 1871 to June 2008. To bring it up to date, the most recent data for the S&P 500 Index (SPX) gives a P/D ratio of just under 32. A year ago it was at 54. The last time we saw a price dividend ratio of 32 was in 1991. To put the current 3.13% dividend yield into perspective, in June 1932 stocks were yielding on average 14% and in July 1982, stocks yielded 6%.

Right now the Dow Jones price dividend ratio is 25.7 which is very close to the long term average. But the ratio can over shoot on the downside. By the way, I’m still looking for similar historical data for the Dow Jones, so if you have a lead, let me know.

And keep in mind that both the numerator and denominator are constantly changing, so this is a fluid number. Although we’ve seen prices fall dramatically these past few weeks, dividends can also fall. So the good news is that this ratio has fallen a lot but the bad news is that it can continue to fall as dividends are cut or reduced.

On the plus side, an important variable that can act as an emergency break on this ratio is the interest rate. If the Fed takes rates down to 1% or less, which some believe is a matter of when not if, then dividends will be much more attractive, relative to the alternatives in the bond market.

Already if you look around you’ll find quite a few high yielding household names like Pfizer (PFE) which is now yielding 7.7%. Looking back almost 30 years (I got tired of looking back more) Pfizer has never skipped or lowered a dividend payment but has consistently raised it.

dow jones 1966 1984 sideways.pngUnless Bernanke takes interest rates down to zero, what we could be facing is a return of this ratio to the “normal” range it has occupied for most of its history. That is somewhere between 12 and 35. Under this scenario, the stock market would flop around for decades as it waited for dividend growth to catch up to it. We’ve seen this sort of market before. From 1966 to 1983 the Dow Jones was a snooze fest. Except for a few harrowing dips, it went sideways and grinded down even the most optimistic bull.

To avoid such a stark reality, I say the Fed should re-inflate like it was 1999 - Disclosure: I’m massively long seaweed CDOs.


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8 Responses to “Price Dividend Ratio Offers Lessons From History”  

  1. 1 Dividends Anonymous

    Makes a very compelling argument for watchin this ratio to see how it reacts to the historical average. I would expect that it overshoots to the downside along with pretty much every other valuation metric we’ve seen recently.

  2. 2 Spooky

    Interesting, but I think easily taken out of context with such a big time span. For example, “dividends” ought to include cash dividends and share buybacks, especially as tax-law changes independently of markets, with big effects on the efficiency of dividends as a way to repay shareholders.

  3. 3 Babak

    DA, it could very well over shoot to the downside. But not if the alternative in the bond market is a zero or negative rate of return.

    Spooky, you’re damned if you do and damned if you don’t… take a long term perspective that is. There is always something wrong with any one indicator. Best thing to do is to throw them in a pot and stir. The resulting broth is usually palatable.

  4. 4 New Bull

    leaving out some important data

    -Bond Yields vs Dividends

    early 80’s one could get 10-12% in muni bonds & 14% T-bills/bond/cds

    where are those rates now……..under inflation?

  5. 5 Rich M

    I agree that dividends mean a lot, and that a sizable market yield can be a buy indicator and also buoy the market some. If not, you get paid well to wait for recovery.

    However, the old days of the Dow yielding “6% to 14%” may be gone forever. Check out this Warren Buffet article where he describes how in the 1920’s the bull run up was partly because investors generally realized stocks didn’t JUST pay dividends, but had a growth aspect. That was a new thing!

    Arguably, earnings growth potential today I think is much higher than in horse and buggy days. An American worker is vastly more productive today due to technology, and efficiency across the board from manufacturing to transportation to the computer age. This higher productivity translates into higher wealth creation and higher annual growth in wealth creation. The greater wealth, in part, goes to the owners, or shareholders.

    The market recognizes this higher earnings growth with higher multiples and therefore lower yields in general, so the market in general is a BUY today at about a 3% yield. Every fundamentals ratio you can use to value stocks indicates they are widely undervalued today, so I would not wait for Dow 5000-6000 and the corresponding 6% yield to buy. It might get that low, but Warren Buffet, at age 78, announced in October that soon he would be personally 100% invested in US equities. That is a hell of an endorsement for Dow 9000 from the greatest investor on the planet. And if he is wrong, he doesn’t have a lot of years to wait for it to come around. By 78, don’t most financial planners say you should be in fixed income, muni bonds, and the like?

    I’m with Buffet and buying. I doubt we will see a fall to the S&P or Dow yielding 5%. :)

  6. 6 jzucker

    You should look at the Warren Brussee blog discussion on this subject. I think you would come to a different conclusion than the one above.

    Good Luck!


  7. 7 Babak

    Thanks J, I’ll take a look at that.

  8. 8 M.I


    Could you please send me the data in form of Excel?

    Thank you in advance.


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