Saturday, March 27, 2010

Dow Price/Dividend Ratio and Dividend Yield History (thru 2012)

This post graphs stock market dividend yields since 1900 and shows that they are at historically low levels. Since the price/dividend ratio is the inverse of dividend yield, valuations based upon p/d ratio are at an all-time high. Historically, expensive markets such as these have produced disappointing long-term returns.

I've argued elsewhere that valuation is important -- it is important not to overpay for investments. A common basis for valuation is earnings; investors decide how expensive the market is based upon how much one has to pay for one dollar of earnings -- the price / earnings ratio. In this blog, I refine that a bit and look at normalized price/earnings ratios. (About Normalized P/E Ratios describes my normalization process.) However, this is not the only way to assess valuation. Another popular valuation metric is the price/dividend ratio -- how much must an investor pay for one dollar of dividends (or, conversely, what is the investor's dividend yield)?

100 Years of Stock Market Price/Dividend Ratio History

Graph of 100 year history of stock market (Dow) price/dividend ratio thru 2012
Dow Price/Dividend Ratio History

The above chart (click to expand) shows the 100-year history of
the Dow price/dividend ratio. For example, the first point on the graph shows that at end-of-year 1900 investors were willing to pay approximately $23 for each dollar of dividends (The end-of-year price was $70.71, and I estimate that investors received about $3 in dividends).

As you can see, for much of the last more than 100 years the price/dividend ratio cycled between 10 and 30, and averaged somewhere around 20. Readings of 30 or above were more often than not associated with periods that, in hindsight, we know were near stock market peaks -- e.g., 1928 and 1965.

What's Going On Here? Is 30 the New 10?

In the last 20 years, however, the price/dividend ratio has consistently scored above 30. In 1999, the price/dividend ratio maxed out at 68.2 -- almost twice the previous high prior to 1990. The market carnage of 2000-2002 and 2007-2008 finally brought the p/d ratio down from the stratosphere. However, after dipping below 30 in 2008 the p/d closed 2010 around 40 before dropping back to 37.4 at the end of 2012.  Still, unless the world has changed, unless 30 is the new 10, the price/dividend ratio seems to be sounding a warning.

100 Years of Stock Market (Dow) Dividend Yield History

100 year history of stock market (Dow) dividend yield thru 2012
Dow Dividend Yield History

Looked at from the dividend yield perspective, the results are equally disturbing. The above chart (click to expand) shows the 100-year history of the Dow's dividend yield. The first point on the graph shows the dividend yield at end-of-year 1900 was about 4.3% -- roughly $3 in dividends divided by a closing price of $70.71. Remember, this is exactly the inverse of the price/dividend ratio. As a result, we could also take 1 divided by the price/dividend ratio, or 1/23, and get the same 4.3%.

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 outcomes. However, in the last 20 years, 3-3.5% has been more like a ceiling than a floor. Since price/dividend ratios have been extraordinarily high, it follows that dividend yields have been extraordinarily low -- the lowest in history. At year-end 1999 the dividend yield reached an all time year-end closing low of 1.5%! At the end of 2012, the yield stood at 2.7%

Not a Cheap Stock Market From a Dividend Yield Point of View

I don't mind saying this makes me a little nervous. This is clearly not good news, but may not be quite as bad as it seems. Today's investors supposedly prefer capital gains to dividends since capital gains receive a more favorable tax treatment. Partially in response, companies have reduced their emphasis on dividends substantially in the last quarter-century. However, historically the dividend contribution to long-term stock market returns has been critical. Unless the reduction in dividends is offset by higher earnings growth rates or further increases in price/dividend ratios (gasp!) long-term returns will suffer.

Note: The above chart is based on DJIA (Dow Jones Industrial Average) data from my Stock Market Analysis Model. Results would be comparable if we used S&P 500 data. Dow dividends prior to 1929 have been estimated based upon another stock market index.

Related Posts

Stock Market P/E Ratio History Since 1929
The Dividend Contribution to 50-Year Total Return shows the historical importance of dividends on 50-year returns.
The Dividend Contribution to 10-Year Total Return shows the historical importance of dividends on 10-year returns.
Additional posts showing the relationship between valuation and future returns:
Rolling Returns vs P/E Ratio Graphs Rolling 10 & 20 year returns showing starting p/e ratios.
The Impact of Starting P/E Ratios on 10 Year Returns
Stock Market P/E Impact on Future Returns similar to the above, but showing the dollar impact.

For lists of other popular posts see the sidebar to the left or the blog header at the top of the page.

Copyright © 2010. Last modified: 2/12/2013

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  1. AI,

    You have some interesting observations here on US equity markets over the last century.

    If you view the URL on my name, you'll see I covered this topic vis-a-vis emerging markets investments.

    In conducting my US research, I was looking for long-term dividend yields.

    Your above charts have yields from 1900 but the spreadsheet starts dividend data from 1928 from Barron's Finance & Investment Handbook, Third Edition, p 853ff. Can you state the source of the beginning data (1900-1927) or how you interpolated that part of the series?

    Many thanks,


    1. PD, I'm travelling. Will get to this late this week or early next.

    2. PD,
      As I mention in the post, "Dow dividends prior to 1929 have been estimated based upon another stock market index." For those years, I estimated Dow dividends at approximately 9.27x the S&P dividends reported in Shiller's Irrational Exuberance data (see link to his data near the end of the 100 Years of Treasury Bond Interest Rate History post.)

  2. Al,

    Do you have an updated version of your stock market analysis model? Thank you!


    1. Kathryn,
      Thanks for the heads up. This one slipped through the cracks. Can't do today, but will try to do tomorrow or this weekend.

    2. OK, try it now. Let me know if you have problems.

  3. Hi

    It would be good if you had a 100 year chart for dividend payout ratio. It can explain why price/divided is so higher.

    1. Interesting thought. I've added it to my list of possible future posts.


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