Price/Dividends Ratio Revisited by Arthur A. Merrill, C.M.T.
In 1988 Merrill showed that the price/dividends ratio was useful in calling the 1987 crash. What's the outlook today?
In the October 1988 issue of STOCKS & COMMODITIES, I described the usefulness of the ratio of price to
dividends in calling the 1987 crash. It shouted warnings. What is the situation today? To review, Figure 1
is the long-term chart of the ratio, after filtering out all swings of the Dow Jones Industrial Average
(DJIA) of less than 20%. Figure 2 brings the data up to date and includes a 10-year history. It's a quarterly
The index is the number of dollars required to buy enough DJIA stocks to yield $1.00 of dividends. It's
the inverse of the yield. The ratio corrects for inflation. Both the numerator (price) and the denominator
(volume) are expressed in dollars, so the dollar value cancels out.