One of my heroes in the world of financial analysis is Richard Russell, publisher of the Dow Theory Letters. Richard has been writing his Letters since 1958. He's now over 80 years old, and is a very highly regarded technical analyst and theorist. He has been complaining for as long as I have been reading him (about six years) that stock dividend yields do not justify the inherent risks. Is he correct? Below is a chart of S&P 500 dividend yields (i.e., the average dividend yield of the 500 stocks in the index) over the past ten years:

From this chart, it might seem hard to understand what Richard Russell is complaining about. After all, dividends currently seem to be well above their average over the past ten years. The key, of course, is to compare stock dividends with prevailing interest rates. The prime interest rate, over the same time period is shown below:



Now, below, I have included another chart showing S&P dividends divided by the prime interest rate:

As you can see, stock dividends have never been greater than 50% of the prime rate during the past ten years. Currently, dividend yields are less than 25% of the prime rate. Ironically, the situation today is that bonds, treasury notes and certificates of deposit all offer greater yields -- and less risk -- than stocks do. This suggests that stocks are overpriced. Ultimately, one would expect rational investors to pull their money out of stocks and into safer, higher-yielding instruments. But, have things ever been different.

Well, Richard Russell has a longer memory than most. Let's look at the same charts one more time -- only over a 60 year period -- rather than a mere ten years. Here's the S&P dividend yield:

Now it is very clear that stock dividends are close to their historical lows.

And below, is a 60-year chart of the prime interest rate.

Now, once again, let's look at the dividend yield divided by the prime rate, over the last 60 years:

Now, we can see very clearly what Richard Russell is referring to when he claims that dividend yields are far too low, and, therefore, stocks are still overpriced. But, it seems as if they've been in this present range since about 1980.

Does this mean that stock prices are going to come down (or that dividend yields must rise)? I would say, probably -- eventually. But, when will this happen? That would be anybody's guess. Contrary to claims of the efficient market theory, the markets are not necessarily rational. For one thing, how many investors have a memory like that of Richard Russell?

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