The Dividend Yield Model Is Flashing A Strong Buy Signal

Philip Mause profile picture
Philip Mause


  • Since 2009, the dividend yield on the S&P 500 Index has stayed between 1.8 and 2.2 percent until recently.
  • As of Friday's close, the dividend yield on the index was 2.31 percent, which suggests that stock prices should go up to bring the yield back into the range.
  • Even if we assume that the range should be moved up based on recent Federal Reserve action, we would still have a range of 2.0 to 2.4 percent.
  • Under this new range, the midpoint would be 2.2 percent, suggesting that 2.31 percent is an attractive entry point.
  • This is confirmed by the fact that the dividend yield on the index is now higher than the yield on 10-year treasuries.

As I have written in the past, here, here and here, since the 2008-09 Crash, the dividend yield on the S&P 500 Index (the "Index") has persistently remained in a narrow range of 1.8 percent to 2.2 percent with 2.0 percent as the midpoint. As a general rule, when the dividend yield on the Index approached 2.2 percent, it was a signal that an attractive entry point had been reached. The dividends used for this analysis have been trailing 12 month dividends. Of course, the Index has moved up over this time period but the gains are almost entirely explained in terms of dividend increases. In most years since 2009, in most years there have been double-digit percentage increases in the dividends paid by the Index and this has propelled the stock market higher.

The market closed Friday at a price of $1880.83 for the Index. Using trailing dividends of $43.39, the dividend yield for the Index is now 2.31 percent. This is outside the range and is either a very strong buy signal or a sign that the model has broken down. One reason that the model may have broken down is that the Federal Reserve has, for the very first time since the Crash, raised interest rates. It would not be surprising for investors to insist on higher dividend yields if they are able to obtain higher interest rates on risk free treasuries.

Using year over year comparisons, the yield on short-term treasuries has increased by roughly .2 percent. If we assume that the model's range should be increased by a similar amount, it would produce a new range of 2.0 to 2.4 percent with a midpoint at 2.2 percent. Even under this new range, 2.31 percent is well above the midpoint and suggests a good entry point. The chart below provides some relevant yields

This article was written by

Philip Mause profile picture
My name is Phil Mause. I am a lawyer in Washington, D.C., getting close to retirement. I am a yield oriented investor and in the last two years, I have done reasonably well in junk bonds, BDCs, mortgage REITS, and dividend paying blue chip stocks. As an avocation, I dabble in stand up comedy. I have been and continue to be a collaborating author with High Dividend Opportunities, a subscription site based on Seeking Alpha.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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