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S&P 500 Dividends versus Yield

S&P 500 Dividends versus Yield

Dividends are kind of a craze now, as people focus on income in an environment where income with reasonable risk is hard to come by.  Now, I used data from S&P 500 (INDEX.INX) to create this graph.  I suppose I could go further back in history and use Shiller’s dataset, but the era of high dividend yields on stocks is over, at least for now.  I can be taught, but I don’t see a lot of present relevance to pre-1990 dividend yields.  The prices of stocks as income vehicles has been bid up, and buybacks absorb much of the free cash flow from mature corporations.

That said looking at 1989 to the present, what do we see?  Dividends rose at a rate of 4.72%/year over the period, and people were willing to capitalize dividends at a rate that grew at a rate of 2.07%/year over the period.  The total return being 9.47%/year over the period leaves 2.42%/year to be the return from the dividends, and capital gains from reinvested dividends.

In one sense, the blue line above gives a fair statement of the crisis we have gone through.  Profits got smashed in 2008-2009, much more than in 2002.  (Note that financials were the core of the recent crisis but were in good shape in 2002.)  In both cases, dividends came back.

In another sense, the blue line is not indicative of the crisis.  Labor force participation has dropped incredibly.  The unemployment rate may be low, but only because many have given up on finding jobs.

My only counsel here is not to seek dividends for their own sake, but accept them if offered in a firm that offers good prospective returns.  I do not look for dividends, but 31 out of my 34 holdings pay dividends, and the average dividend (including non-payers) is 0.7% higher than the S&P 500 dividend yield at 2.75%.

I don’t so much believe that dividends have value, as many companies that pay dividends have value.  Free cash flow is valuable, and results in dividends, buybacks, and reinvestment in the business.  Find those firms that produce free cash flow, and dividends will typically follow.

By David Merkel, CFA of Aleph Blog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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