Anybody see Mauldin's column this week ? Link below. Talks about last 20 year equity boom as the result of decrease in dividend yields and increase in multiple. Then we'll see regress-to-mean stuff forward.
I don't get it. I don't see where the dividend yield drop matters. And I don't see current PE's all that lofty.
Appreciate any thoughts.......
Thoughts from the Frontline
So, if stocks were yielding 6% in 1982, and are now yielding 1.8%, should we expect to repeat the 13.9% of the past quarter-century? Of course not. On average, 5% a year came from capital gains attributable to multiple expansion - over and above what growing earnings and dividends contributed. Take that away, and we're at 9%. After all, that's what we'd have earned if dividend yields still matched the average yield of the quarter century. But, even that's too aggressive. Dividend yields are 2% lower than their average during this span and 4% lower than the starting yield of 1982. Take 2-4% away, and we should expect 5-7% from our stocks in the years ahead.
Over the past century, dividends have provided over two-thirds of the real returns earned in US stocks. Today, they hover well under 2%, while nominal bond yields are in the 5% range. Simple arithmetic points to 5% returns for bonds and 5-7% for stocks - if their respective yields don't rise in the years ahead!
Rising yields and shrinking P/E ratios would mean capital losses which would reduce returns below these levels, much as falling yields and rising multiples fueled the wonderful returns of the past 25 years.