P/E Ratio vs. Dividend Yield

The dividend yield of the stock market is relatively low by historical standards. Why? There are two reasons. Many studies present the first reason: corporations are paying a smaller percent of earnings in dividends. Historically, over the past century, the dividend payout ratio has averaged 35% to 60% of earnings. Today, the average payout ratio is near the low end of that range. The second reason, explored by this analysis, is that valuation directly affects dividend yields. As the price-to-earnings ratio (P/E) rises, the price-to-dividends ratio rises as well, thus lowering the dividend yield. This relationship presents another view of the market’s relatively high valuation.