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At a time when stocks yield less than 2% from dividends, equity investors must depend on regular appreciation in price to give them a decent return.
It also increases the ultimate revenue yields from the dividend, capital gains and estate taxes.
In the past, when yields from bonds, dividend-paying stocks and other fixed-income investments such as CDs were higher, a retiree could invest primarily for income and hold onto his or her principal.
Hussman fed into his models the assumption that the market retreats to a 3% dividend yield from its current 2%; a 3% dividend yield would mean that the market is still overvalued by historical averages.
Select a minimum dividend yield in the "Dividend Yield" field.
The dividend yield from shares is historically high, compared with government-bond yields.
Indeed, investors can get an almost identical dividend yield from holding stocks like Microsoft.
The real rate of earnings growth edged up from 1.3% to 1.8% a year but that failed to compensate investors for the fall in the average dividend yield from 5.2% to 3.2%.
But the corollary is that the returns to the owners of capital decline.The effect is disguised in the short term by the effect of yields on capital values; a fall in the dividend yield from 4% to 2% doubles share prices (other things being equal).
That may well have increased the ex post risk premium (other things being equal, a fall in the dividend yield from 4% to 2% means investors double their money).The size and persistence of the ERP led some commentators in the late 1990s to come up with an ingenious, if flawed, argument.
Result: a 7.8% dividend yield from two stocks with stand-alone yields of around 5%.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com