High dividend yields support equity returns

Over the past seven decades in Australia the level of ‘real’ dividend yields across the market has provided a pointer to broad stock market rallies ahead. The ‘nominal’ dividend yield is the aggregate level of dividends for the market over the most recent 12 month period divided by the current market index level. The ‘real’ dividend yield is the ‘nominal’ dividend yield less the current or most recent annual inflation rate. A similar measure also works for the US market... When the real dividend yield reaches 2.5%, the market has rallied for the next several quarters. This measure considers all of the rallies through the 2000s credit/mining boom, the GFC, the sovereign debt crisis and QE boom, and it has also worked in all prior cycles since World War 2, except in the high-inflation 1970s. In 2014 the Australian market was flat but at the end of 2014 the real dividend yield once again reached 2.5% indicating the market was likely to rally, and it has indeed risen strongly. (VIEW LINK)


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