According to Mike Maloney, the dividend
yield is the second best way to measure a stocks value (after the Price Earnings Ratio). The ratio indicates how much a company
pays out in dividends each year relative to its share price. In other words, it measures how much "bang for your
buck" you are getting from dividends. In the absence of any capital gains, the dividend yield is effectively the
return on investment for a stock. The lower the dividend yield, the less you get for your investment and hence the
more overvalued a stock. The historic S&P 500 Dividend Yields were deducted by Robert Shiller and published in his
book Irrational Exuberance.
In recent years, rather than paying out a dividend, share repurchases have become a popular way for companies to return value to their shareholders. This new practice partly explains the lower dividend yields that we have been experiencing.
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