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Replies to post #124 on AIM UK

Replies to #124 on AIM UK

OldAIMGuy

02/26/09 3:09 PM

#125 RE: ls7550 #124

Hi Clive, I've been fiddling with this for a few days and decided a rational view of dividend yield was to compare it to the current short term interest rate (I used the 13 week Treasury rate). My thought was that dividend yield would need to be a compelling argument to assume risk against an essentially "risk free" investment in a money market fund that was based in short term government paper.

As we know, people invest in stocks not just for the dividend but for the total return they might achieve from both the yield and the price appreciation over time. Even so, it seemed an interesting idea to measure the two together. What was apparent was the short term interest rate has been higher than the yield most of the time. So, people were truly "banking" on price appreciation if they were investing in stocks.

I ended up using the Value Line "Median Estimated Dividend Yield of all dividend paying stocks under review." I then subtracted it from the prevailing 13 Week Treasury rate for each week. I then graphed the results against the S&P 500. I used the period of 1998 through the current date.



When interest rates are very low compared to median stock dividends we see the chart go "negative" - a very bullish sign. Low yield with high interest rates would be a compelling argument to be holding short term treasuries in place of common stocks.

Unfortunately I don't have data going back a lot further. This is a reasonable sample, however.

I note that the peak interest rate on your graph for around 1994 is the same peak seen in the U.S. In December of 1994 the median Value Line yield was at 7.8%. Today it is sitting at 3.5% and back in 2007 it was regularly only 1.6%. It appears the UK has been more generously paid for its common stock investment risk than has the U.S. over much of time.

Best regards, Tom