Annual Dividend Yield SP 500

Source: Global Financial Data

Jubak, and many other observers, would argue that today's low dividend yields are symptomatic of our overvalued markets. Well, maybe markets are overvalued. But I believe dividend yields are so low for another reason: Investors are beginning to ask our childish question: "Why are there dividends?" And they're not finding good answers. So dividends are becoming less and less important.

Just think about how silly it all really is. Why would a shareholder want a company to send him his own money back? That's a confession by the investor that he would really rather not invest in that company to begin with. And it's a confession by the company that its investors can invest their money more profitably than the company can.

More and more investors and companies are seeing it this way. But there was a time when everyone felt like Jubak. In those days, dividend yields on stocks had to be high because investors saw high dividends as compensating for the risk of equity ownership. When dividend yields were low, investors reasoned they'd be better off investing in the same company's bonds. After all, why not earn a higher return with less risk?

In fact, for most of the last century, the conventional wisdom was that whenever the dividend yield on the stock market fell below the coupon yield of the bond market, it was time to sell stocks. Take a look at the chart below, which shows the difference between the dividend yield on the S&P 500 and the coupon yield on Moody's Aaa Corporate Bonds Index. When stocks yielded less than bonds briefly in 1929, that was one of the greatest stock market sell signals in history.

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