The dividend yield is the annual dividend payments divided by the market capitalization or more simply, the dividend per share divided by the price per share. The chart above presents the dividend yield for the S&P 500. The green circles represent significant market bottoms and the red circles represent significant market tops.
The green chart was added and graphically depicts the SPX from the 1982 low (SPX 100) to present day (SPX 1318). The pink lines show the 18-year cycle. A bear market was in place from the mid 1960's into August 1982 when the rip-roaring 18-year bullish cycle kicked in and the markets celebrated into the dotcom bubble high in 2000. Markets now continue along a little more than halfway thru the 18-year bear cycle currently, and note that stock prices remain elevated at levels at the start of the cycle. Perhaps the next eight years will finish the story.
One way to interpret this chart is the directional move of the divvy yield to determine market direction, it is obvious above that the divvy yield moves opposite the markets. In 1982, the dividend yield on the SPX reached 6.7%. During the next five years, into the 1987 Black Monday crash, the divvy yield had dropped to about 3%. Note how the directional move with the green and red circles directly correspond to the market highs and lows, with lows occurring in 1982, 1988, 1990, 1994, 2002 and the March 2009 bottom.
Note the long drop in divvy yield from the 1982 market bottom to the late 1990's market top, about 18 years, form the 6.7% down to about a 1.4% low. During this period stock prices were rising faster than divvy payments from earnings. Thus, if the price per share is rising faster, reference the formula above, price is in the denominator of the ratio so if price rises faster the divvy yield moves lower faster. Think back to high school math and fractions, hopefully you paid attention that day.
What does all this mumbo jumbo mean? In a nutshell, here in January 2012, we are at a very low 1.91 divvy yield, sure there are lower numbers in the previous decade that would be possible but do you think it is more likely for the divvy yield to move upwards from here, or downwards? Keystone projects upwards which corresponds to markets continuing lower as the 18-year bear cycle continues to play out towards 2018.
S&P Dividend Yield chart with the above annotations can be found by using the search box above for keystone speculator.