Does the market's low dividend yield foretell future returns?

After the market’s most recent rally, the trailing SP5 dividend yield is clocking in at 1.3%. That's the lowest since the late 2021 WFH rally when it touched 1.27% (as of 12/31/2021). (The dividends are 19.2% higher while the index price has gained slightly less, 16.2%.) The all-time quarterly low remains 1.12% (as of 3/31/2000), right before the internet bubble burst.

Is this a problem? For a Dividend Investor in a Stock Market, yes. For decades, if not centuries, the cash yield of an investment was a good indicator of future returns. (Higher = better). That relationship ceased in the 1990s. Dividend yield has not been a good indicator of (basically non-dividend) future market returns for decades now. Peter Bernstein, the great financial journalist and bridge between gown and town, wrote at the time that the broken linkage was a puzzle. But he concluded that capital gains had supplanted cash payments and that the world was OK with that. That still appears to be the case with most punters today.

Another reason stock investors may be content with the current arrangement is that the market's all-time low yield was during the internet bubble, a frenzy built around some very good companies but also a lot of empty shells. With a few exceptions--a particular EV company is the bee in my bonnet--the companies driving the market now are all very good businesses. Their share prices may be outrageous, but their products, moats, and profits are all quite real.

So steady as she goes, with a 1.3% yield? No, I think not. I argue in The Ownership Dividend that--despite coming on four decades--the cashless US stock market paradigm is unusual and is on the verge of a major shift.

My call might have been early, but it is hard to see how it could be wrong. Why? For this entire period of disappearing dividends, interest rates were going down. That has stopped. For the entire period of disappearing dividends, newly unleashed (1982) buybacks were infiltrating Wall Street, the C-suite, and the psyche of investors. That continues, but there isn't much room for growth. Everyone knows about them already and they will constitute $1 trillion this year. For this entire period of disappearing dividends, Nasdaq/Silicon Valley was the intellectual engine of the business world. That also has not stopped, but these companies are now mature and beginning themselves to pay dividends. Finally, the global neo-liberalism dominant from the 1980s through 2020 was ideal for the run-and-gun nature of the market. That framework came to a crashing end in 2020-2022 and the political realignment is playing out before our eyes in 2024.

When will the cash nexus in stock investing return? Unless you believe interest rates are going to zero again, and investor trust of management is unlimited, it is a matter of when, not if. Looking forward to debating this Paradigm Shift with Donald Chew at the upcoming CFA New York event on July 17th. Open to non-members. Please come out.