"How, Oh How, Is the Economy Not Recovering?"

I love stories like this where the "professionals of Wall Street" (remember those guys, the ones that headed up elite investment banks like Bear Stearns and Lehman Brothers) are "shocked, shocked" the economy hasn't recovered yet. What I love more is when they put the cart before the horse, driving up stock prices FIRST, presuming economic growth will follow. And then, perhaps the greatest quote in the entire article is:

"With these kind of dividend yields, these stocks are a steal!"

So once again it seems high time to me to explain the "dividend yield" and provide an important lesson in this fascinating ratio.

The dividend yield is the dividends of a stock divided by the price of a stock. In short it shows you the percent return you can expect to receive from dividends. So for example if a stock pays a $1 dividend per share and it's currently trading at $10, your dividend yield is 10%.

Most people scoff at dividends because they invest in stocks "because they will hopefully go up in the future." This increase in the stock price is called a capital gain. And while they provide the basis for millions of people's retirements and trillions of invested dollars, the premise of investing in a stock "because it will go up in the future" is flawed and will cause a horrendous problem in the future.

Understand what drives the price of a stock is the earnings or profits the firm makes.

HOWEVER,

you as a shareholder will not see the earnings of the firm. You only get to see the portion of the earnings the firm decides to pay out as it may wish to retain some of those earnings and reinvest them back into the company. This portion they pay out is the dividend.

Now, if you think about it, you will realize that the ONLY thing that really drives the price or value of a stock is the dividends because that is ALL the shareholders see.

Of course some people will say, "Yes, but don't I get SOME money in the future if I sell it?"

Correct, but when you sell it in the future, why did somebody pay you money for your shares? Or a better question, "what did you sell to that person?"

You didn't sell him "something you can sell for more in the future." You sold him a share of stock that will entitle him to the future dividends that stock will pay. That is what gives the stock value. The stock could be sold over and over again, but you are inevitably selling a security that pays out dividends and nothing else.

So are dividends so high and prices so low that they are "a steal" as super intelligent Wall Street investment types say they are?

Well, here you go.



I've pointed this out before, but I shall say it again.

Dividends historically paid out around 5%. Today they are below 2%.

The reason why dividend yields are so low can be explained by reading the post about 3 posts below titled "When You Abandon Fundamental Value."

So my fine loyal readers, take it from the Captain. Right now buying the average S&P 500 stock is like buying something at about 2.5X's more expensive than it traditionally has been. To put it into perspective think of common everyday consumables we buy with the following prices;

A gallon of gas going for $9.75
A Kia Rio going for $25,000
A Big Mac going for $8.75
A movie ticket for $25

That is what (using the dividend yield as a metric for value) buying into the US stock market is like today.

And bar any economic growth (which there is "surprisingly little" of), you can expect reality and efficiency to hit the markets. May not happen today. May not happen tomorrow. But it will happen. And the only thing that is going to give your precious little 401k balances a boost is going to be BOOMING economic growth that can only come from a Austrian economic model ala Ronald Reagan circa 1981 and not this Keynesian nightmare the naivety of the American voting public has wreaked upon us.