In 2024, more than 75% of S&P 500 stocks pay a dividend of some amount.  Today the overall weighted dividend yield of the index is about 1.40% annually.    However, the historical yield has been much higher.  A look back at recent decades tells us the following:

Between 1871-1960 the S&P 500 stocks never had a yield below 3%.

Between 1970-1990 the S&P 500 stocks yielded closer to 4%.

Between 1991-2007 the S&P 500 yielded on average about 1.90%. 

During the 2008 financial crash, the yield briefly spiked to 3.11% as stock prices declined quickly.

Between 2009-2019 the S&P 500 yield steadily increased to an average of 1.97%.

A stock’s yield is calculated by dividing the annual dividend per share by the current stock price, and then multiplying by 100 to convert it to a percentage.  As a result, lower yields across the broad markets are a result of elevated stock prices.

Some companies pay stock dividends at a consistent rate, some try to consistently grow their dividend.   However, over the decades, stocks that pay some form of a dividend, even if it is a nominal yield, tend to outperform stocks that don’t.

What we can see from the chart above courtesy of WisdomTree, is that when looking at a broader market picture of the Russell 1000 index, we are in somewhat uncharted territory.  A time in which stocks that don’t pay dividends have very recently outperformed by the largest margin on record when compared to the top quintile of companies with the highest dividend yield.

Remember that in order to pay any kind of a consistent dividend income, a company is generally profitable, not just projecting future profitability.   What this chart seems to demonstrate is that there are still a large number of very expensive companies in the market, and that is most likely concentrated on the large cap growth side of the S&P 500 and Russell 1000 indices.

As we have discussed in prior recent articles, while value stocks have better long-term performance than growth stocks, this has not been the case in recent history.  For more than a decade, US large cap growth has outperformed.    As a result, stocks in general today trade at more expensive levels.

The average price to earnings ratio (P/E) of the S&P 500 is today about 23.99.   Looking back at years past we find the following:

During most of the 1970’s and into the early 1980’s, with higher interest rates, the S&P 500 traded at a P/E ratio of less than 15.  

During the tech bubble of the late 1990’s the P/E ratio of the S&P 500 remained closer to 30.

After the 2000 tech wreck, P/E ratios came back down to closer to the 15 range. 

Immediately following the 2008 financial crisis, P/E ratios on the S&P 500 fell back towards a ratio of closer to 15.

Then as interest rates remained close to zero from 2009 until 2017, we saw P/E ratios begin to steadily increase back toward the high 20’s again.  

P/E ratios have demonstrated a direct inverse relationship with interest rates.  The theory is that when there is a lower rate of earnings on fixed income, it begins to make more sense to pay more for earnings.

However, now we are back to a 5% plus interest environment, which has not been seen since 2007.   We would argue that on a historical basis, this is a more normalized rate environment.   If rates were to stay here, or higher for a prolonged period, then one can assume that looking at the historical record, P/E ratios should decline.  That would mean that stocks need to either decline or grow slower.

Such an environment would likely favor dividend paying companies that are more value oriented.  Ultimately, there is always a “reversion to the mean” at some point in time, although none of us can predict the short-term with any degree of accuracy.  However, at least the current data does suggest that we may be moving into an environment that favors such dividend paying value companies as compared to growth stocks.

  Filed under: Articles
  Comments: Comments Off on Do Dividend Payers Outperform?

Yale economist Irving Fisher, October 15^th 1929: “Stock prices have reached what looks like a permanently high plateau.”

A trip down memory lane looking at some of the economic predictions of the past can lead to a number of laughs, although not necessarily amusing to those who lived through the events that were so poorly predicted.   However, what it really serves to do is remind us that there are few certainties in economics.   As we have said in the past, markets are a massive financial eco-system with an ever-increasing set of shifting variables that make short-term predictions little more than an exercise in futility.

Unfortunately, Mr. Fisher’s comments in 1929 referenced in the NY Times article above is not alone in his failed predictions.  The number of dramatically inaccurate predictions by economists, market guru’s and CEO’s would be endless.   Here are just a few of the more astounding ones.

Dr. Ben Bernanke, (Federal Reserve Chairman) January 10^th 2008: “The Federal Reserve is currently not forecasting a recession.”

Dr. David Lereah (US economist), August 12th 2005: “I truly believe the housing market will continue to expand. But rather than the double-digit price appreciation we’ve seen, we might see that drop to a 5 or 6 percent appreciation sometime toward the end of next year.”

Franklin Raines (CEO of Fannie Mae), 10th June 2004: “These subprime assets are so riskless that their capital for holding them should be under 2 percent.”

Dr. Paul Krugman (US Economist) September 29^th, 1996: “By 2005, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s”

Dr. Paul Samuleson (First American Nobel Laurette in Economics) 1961: “the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.”

Jim Kramer (Market Guru) March 11^th 2008: “NO! NO! NO! Bear Stearns is fine. Don’t move your money from Bear, that’s just being silly.”

As we can see, there is no shortage of terrible predictions that didn’t age well.   In fairness, some of the same people have made some predictions that have come true.  Or in some cases, positive or negative predictions turned out to be correct, but the prognosticator was simply early in their prediction.  And some prognosticators on economic and market forecasts have better track records than others.  But none are 100% successful.

What this demonstrates more than anything is the acknowledgement that economic predictions are difficult, and short-term market forecasts are impossible to do with any consistency.   What makes market forecasting even more difficult is the fact that the markets and the economy are not one in the same.   Economics has an impact on financial markets without question.  However, as we often like to say, the market and the economy are often thought of as siblings, when in fact they are more like cousins.

As a financial advisor, the reason we suggest clients look at investing from a longer-term perspective that is built around asset allocation is the clear evidence that all asset classes will appreciate if given enough time.  But predicting when, and how much within a specific period is next to impossible.    The very concept of asset allocation means to own numerous asset classes that don’t necessarily always go up or down simultaneously as a means to balance and mitigate risk.

Essentially, you are saying that you know enough to know, that you just don’t know.   If and when someone says something is definitely going to happen, be skeptical.   The masses are often wrong, and the supposed “experts” are frequently wrong.

  Filed under: Articles
  Comments: Comments Off on Economic and Market Forecasts: What are They Worth?