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To: GST who wrote (74738)	8/9/2001 1:41:25 PM
From: long-gone	Read Replies (1) \| Respond to of 116764

Federal Reserve Bank of Cleveland \| April 1, 2001 Economic Commentary Why is the Dividend Yield So Low? by John B. Carlson The dividend yield on stocks has dropped sharply over the last decade. Is its drop reflective of irrational exuberance, as some have claimed? This Commentary assesses alternative explanations for the diminished dividend yield. Dividends play a central role in traditional models of stock valuation. In such models, stocks have value because they hold the promise of future cash payouts. Dividends constitute the primary cash payment to stockholders—the greater the expected future stream of dividends, the greater the value of the stockholder’s share. The dividend yield equals a stock’s total dividends per share over the most recent four quarters, divided by the current price of the stock. The resulting number is represented as a percentage and thus is comparable to an interest rate. Figure 1, showing the dividend yield on equities since 1871, reveals a striking decline in this measure over the past decade. The dividend yield now stands at around 1¼ percent, a near-record low. What explains this 10-year decline? To address this question, it is important to understand that the dividend yield is only one part of a stock’s return. Another element of return derives from appreciation in the price of a stock. Price appreciation is typically realized when firms reinvest earnings and achieve higher earnings growth that allows higher future payouts. Stock prices can also rise when a firm repurchases its shares. Share repurchases reduce the number of shares outstanding, increasing each remaining share’s claim on earnings. If shares are repurchased in lieu of dividends, the per share value (the price) increases. A Historical Perspective (cont) clev.frb.org