There are many ideas about market timing, stock valuation, and financial ratios. Text books, popular finance books, blogs, and television offer a buffet of theories. The goal for all is buy low and sell high, right? But how to do so is not easy. Use the Dividend Yield to Value the Market. This approach is quite simple and time tested. The dividend yield is the opposite of the Price Earnings ratio. It's a strategy which considers the market (or an individual stock's) earnings and values those earnings as a percent of the security price. Then, take that percentage and compare it to the yield on 10 year US Treasuries.
According to Felix Salmon's Reuters blog, generally there is a 2% spread in either direction between the S & P Index earnings yield and the yield on 10 year treasuries. Last month, with Treasury yields at historical lows, there was a 7% spread between the S & P 500 dividend yield and that of U.S. Treasuries. Stocks may not be a screaming buy, but their long term potential far surpasses that of Treasury bonds.
Source: Benzinga
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