current dividend yield.pdf

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News & Politics
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
November 2008 
 
 
Are stocks cheap based on dividend yields? 
 
Mark Schmeer, C.I.O. – Equities, MFC Global Investment Management (Canada), comments on recent 
market performance. 
The month of October saw stock markets worldwide plunge to record levels, driving up dividend yields. The 
current dividend yield on the S&P 500 stock index is 2.8 per cent, the highest in 10 years and compares with a 
1.8 per cent yield in the same month last year. The S&P/TSX Composite index dividend yield is currently 4.0  
per cent, the highest in about 20 years, and up from 2.3 per cent in October of 2007. This may be an indication  
of exceptional value in the stock market, but only if dividends are sustainable. 
As shown in the accompanying table, the S&P 500 current dividend yield of 2.8 per cent, while at a 10-year high, 
is below its 52-year average, ranking at the 35th percentile. On the other hand, the S&P/TSX Composite has an 
above-average current dividend yield of 4 per cent, ranking at the 86th percentile, a level not seen since October 
of 1990. Historical dividend yields for both indices are shown in the charts on page two. 
Due to weak earnings and the limited number of dividend cuts, 26 per cent of stocks in the S&P 500 now have a 
payout ratio of more than 50%. In Canada, excluding income trusts, 8 per cent of TSX companies have a payout ratio 
greater than 50 per cent. In order to see what the current dividend yield would be if all companies limited their payout 
ratios to more reasonable levels, we applied maximum payout ratios of 70 per cent, 60 per cent and 50 per cent to 
both stock indices (with the exception of Canadian income trusts which we maxed out at 100 per cent). The following 
table displays the results of our dividend analysis. 
Market Index 
Maximum 
Payout (%) 
Wtd Avg Dividend 
Yield (%) 
Percentile 
S&P 500 
current 
2.8 
35 
 
70 
2.4 
30 
 
60 
2.3 
29 
 
50 
2.1 
26 
52-year average 
 
3.2 
50 
TSX Composite 
current 
4.0 
86 
 
70 
3.5 
71 
 
60 
3.5 
70 
 
50 
3.4 
64 
52-year average 
 
3.1 
50 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Applying a 50 per cent maximum payout reduces the S&P 500 dividend yield to 2.1 per cent and the TSX 
dividend yield to 3.4; 
At present, equity dividend yields are approaching the yield on 10-year U.S. government bonds and actually 
exceeding government yields in Canada. This may be an indicator of exceptional value in the stock market. 
 The S&P 500’s 2.8 per cent dividend yield is 71 per cent of 10-year Treasury yield of 3.92 per cent; the ratio 
drops to 54 per cent if we apply a payout maximum of 50 per cent 
 The S&P/TSX current dividend yield is 105 per cent of 10-year Canadian bond yield of 3.81 per cent or 81 per 
cent if we apply a maximum payout of 50 per cent 
S&P 500 Historical Dividend Yields 
         S&P/TSX Composite Historical Dividend Yields 
          
 
 The ratio of the S&P 500 dividend yield to interest  
rates is currently the highest it has been in 30 years 
 
 
 
 
 
 
 
 
 The ratio of TSX dividend yield to interest rates 
is at a level last seen in 1958 
 
 
S&P 500 dividend yield as % of US Treasury yield 
S&P/TSX Composite dividend yield as % of 
Canadian government bond yield 
       
 
 
If we apply a 50% payout maximum, the ratio of dividend yield to interest rates remains well above average 
and in the case of Canada, it is still near its 50 year high 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends are latest quarter annualized; current dividend is as of November 3, 2008. Payout ratios are based on lesser of  
2008 / 2009 estimated consensus earnings 
Sources: Bloomberg, TD Waterhouse