It’s a red flag for everybody

S&P 500 dividend yield hits 1.08%. The lowest payout rate since the 1800s is a retirement red flag.

The headline makes it sound as if companies are being stingy with their dividend payments. And they are. Many have persuaded investors to just fork over their hard earned money – just trust us, we’ll make it grow – and often they do. But when a company is already one of the biggest in the world, the runway for growth is limited. It’s time to show them the money.

Paying dividends isn’t the only way to do this though. Companies can also buy back shares. But this benefits insiders with stock options compensation more than the average investor. This helps explain the media’s enthusiasm for it.

It also requires the investor to sell in order to realize any return whatsoever. But at the same time, investors are being urged to hold.

Imagine if other forms of investment worked this way. Investor owns an apartment. Prospective tentant comes along and says “How about you let me live here rent free? You’ll sell the apartment for more then you paid for it.” If you bite, you may as well have “CHUMP” stamped on your forehead. Investors have lost their skepticism, allowing Wall Street to sell them stocks based on earnings claims alone.

Earnings are when the company sends you a note telling you how much money you made.

Dividends are when it sends you the money.

But the record low dividend yield isn’t just an indication of corporate greed. It’s an indication of extreme stock valuations. Dividend yield isn’t determined by the payer. The dividend payer merely sets the dollar amount of the dividend it pays. The market price determines the yield.

It’s just like it is with bonds. The yield is the dollar payout divided by dollar price. If a company pays $5 annually, the yield is 5% … if the market price is $100. If the market price is $200, the yield is only 2.5%. If the market price is $400, the yield is just 1.25%.

If the yield is a pathetic 1.08%, that’s a very expensive stock.

That the S&P is priced in such rarified air is corroborated by multiple other valuation measures, include price to book, price to estimated forward earnings. price to sales, market cap to GDP, Shiller’s CAPE, Tobin’s Q, etcetera. No matter how you slice it, this is one of the most richly valued markets since the South Sea bubble.

Not since 1720 have investors paid so much for so little.

This is a pathological situation. Before the advent of the Fed and chronic inflation, stocks typically yielded more than bonds. That was your compensation for the higher risk. If your stock “went up”, that was gravy. But as it slowly dawned on investors that inflation was here to stay, stock prices rose and yields fell. By the late 1950s, they were lower than bond yields. Now that situation has reached new extremes. Incredible wealth is concentrated in a few hands controlling super corporations, and instead of recirculating it throughout the economy, the relative lack of dividends helps keep it bottled up within them. We already have oligarchy. One can only wonder what the end game is.