it’s a remarkable period
A flood of monetary liquidity and fiscal deficits.
To the extent that this buoys the economy the populace has less to complain about and the politicians are glad. The authorities see no reason to do what Keynes said (“run deficits during periods of economic contraction, but run counterbalancing surpluses during expansions”) or what Friedman said (“expand the money supply at the rate of growth of the economy”).
We’re living through a special period in the United States, characterized by:
. the dollar as the international reserve currency
. low-inflation benefits of cheap manufacturing labor due to globalization
. governmental processes remote and opaque (so: few understand or care about fiscal irresponsibility)
CPI inflation is low, and wage inflation is low, but asset-price inflation is high. This makes the rich (who own the lion’s share of the stocks, bonds, and real estate) richer. And it exacerbates income disparities. It also assures that this special period will end. Prices can’t go much higher and returns on capital can’t go much lower.
People used to invest in blue-chip stocks in order to get paid an annual dividend. My grandfather came to the United States in the early 1930s. By around 1940 he had enough money to do some investing. He bought AT&T and got a 5% return every year. Over time there was also capital appreciation as the stock price went up. But he never sold. His retirement was comfortable based on his receipt of the dividend each year.
With the stock markets at new highs the dividend yields are now almost unbelievably low.
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https://www.investopedia.com/articles/markets/071616/history-sp-500-dividend-yield.asp
A History of the S&P 500 Dividend Yield
The S&P 500 index tracks some of the largest U.S. stocks, many of which pay a regular dividends. Reviewing the history of the S&P 500 dividend yield can provide insight into the stock market’s direction.
Dividend yields from blue-chip U.S. companies have been trending downwards over time. In fact, dividend yields have remained relatively low (below 3%) since 1992.
A quick review of the history of the S&P 500 reveals just how abnormal sub-3% annual yields have been since the 1800s. Thanks to aggressive monetary policy and the rise of technology stocks, today’s dividend investors have a bigger hill to climb than their predecessors.
Historical dividend yields for the S&P 500 have typically ranged between 3% to 5%. During the 90 years between 1871 and 1960, the S&P 500 annual dividend yield never fell below 3%. In fact, annual dividends reached above 5% during 46 separate years over the period. The average between 1970 and 1990 was 4.21%. From 2020 onward, the dividend yield fell below 2% and has stayed below that since then, ranging between 1.24% to 1.78%. [It was 1.47% as of 1/19/2024.]
Monetary Policy Effects
Two significant changes contributed to the collapse of dividend yields. The first was Alan Greenspan becoming chair of the Federal Reserve in 1987, a position he held until 2006. Greenspan responded to market downturns in 1987, 1991, and 2000 with sharp drops in interest rates, which drove down the equity risk premium on stocks and flooded asset markets with cheap money. Prices started climbing much faster than dividends. Despite evidence that these policies contributed to housing and financial bubbles, Greenspan’s successors effectively doubled down on his policies.
The Rise of Tech and Internet Companies
The second significant change was the rise of internet-based companies in the United States, especially following Netscape’s initial public offering (IPO) in 1995. Technology stocks proved to be quintessential growth players and typically produced little or no dividends. Average dividends declined as the size of the tech sector grew.
