Dow Dividend Rising Significantly

Summary

Earnings and dividends have both risen substantially over the past year to record levels. However, dividend increases are lagging earnings by a wide margin.

The P/E ratio and the dividend payout ratio of the DJIA have fallen significantly back towards their respective historical lows.

The changes enacted by the Fed have brought down the yield of the 30 year T bond to the 3.1% level. Lower rates for longer still seem probable.

Dividend increases this year should push the dividend discount value of the DJIA up to 60,000 by mid-year and 63,000 by year-end, compared to a DJIA price of 25,820.

Very Rude Interruption to Last Year's Expectation of DJIA 30,000

What happened to cause the unexpected Christmas flash crash? Fed tightening? Tariff barriers? Trade wars? Year-end rebalancing? Tax-loss selling? The Republican loss in House? Hedgies and momentum players trying to lock in what might have remained of their profits? Brexit? Perhaps a combination of all of the above? Certainly, what was not expected was the Grinch stealing the Santa Claus rally with such speed and viciousness. It provided, however, an excellent buying opportunity.

However, Fundamental Improvements to Hold Sway

With the price of the DJIA having rebounded sharply over the past two months, perhaps this is a good time to see what fundamentals caused such a reversal from the “Christmas Eve, Flash-Crash Massacre”.

The DJIA earnings have certainly benefited from the late 2017 tax cuts and stand at a record $1,570.07.

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Over the past year, the P/E ratio has fallen back to the levels of the post-Lehman years when following a sharp of recovery earnings immediately after the great recession, both the earnings and the multiple stagnated through 2017.

(Click on image to enlarge)

Over the past four decades, the P/E ratio of the DJIA has swung wildly as recessions took their toll on earnings while the 30 year T bond yield has generally fallen from 15.2% in 1981 to the 3.1% level today. The declining 30 year T bond yield pushed up the P/E ratio over time as the discount rate declined until Lehman but not thereafter.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not ...

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