The Dividend Indicator May No Longer Work

Here’s the S&P 500 (blue line, left scale) and its dividends (black line, right scale). The two lines are scaled at a ratio of 50-to-1, meaning the yield is 2% whenever the lines cross.

Over the last 20 years, 2% has worked decently well as a fair value estimate, except for an 18-month stretch during the financial crisis.

The relationship started to break down in 2020 as many companies have suspended their dividends. For 2020, dividend payments rose but very slightly.

The chart may look scarier than it really is. The problem with any valuation measure is that the underlying factors may have changed. That could be happening here.

Posted by on January 4th, 2021 at 12:08 pm


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