V.13:08 (329-331): Dividend Yield Buy-and-Hold Meter by Elliott Middleton

V.13:08 (329-331): Dividend Yield Buy-and-Hold Meter by Elliott Middleton

Here's a comparison of the historical dividend yield of the S&P 500 on a monthly basis and what the 10-year total return for the S&P was after each observation of the dividend yield.

How many times have you heard this: "Over any 10-year period, you'll do fine in the stock market. Just buy and hold, don't try to time the market. Everyone knows you can't time the market."

Wrong. While generations of finance professors have been taught - and in turn have taught their students - that the stock market follows a random walk†, a new wave of research, much of it coming from the same universities that originated the random walk theory, has challenged the status quo.

The relationship between dividend yield on the broad market and succeeding long period returns is one that practitioners have been aware of for decades. The stock market exhibits long-term autocorrelations - that is, decades of exceptionally good returns tend to be followed by decades of exceptionally bad returns. This pattern is consistent with a commonly seen story in the stock market that stresses the tendency of participants to overreact; they become too bullish on the way up, and too bearish on the way down. Gustave LeBon wrote about such tendencies a century ago in The Crowd .