Are stocks cheap based on dividend yields?
Mark Schmeer, C.I.O. – Equities, MFC Global Investment Management (Canada), comments on recent
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.
Wtd Avg Dividend