Market Correction Unlikely: The S&P 500 2% Dividend Yield Model Appears To Be Intact

Since the Fall of 2009, the S&P 500 has persistently traded at a dividend yield of roughly 2%. More specifically, it has traded between 1.8% and 2.2% for virtually the entire period. At a current price of $2105.53 and dividend yield of 1.94% the market is well within that range. A 20% correction (to a price of $1684.42) would produce a dividend yield of 2.42% if it occurred very rapidly and an even higher dividend yield if it occurred over several months (because dividends would increase over this period). Before this transpired, yield hungry investors would likely support the market by buying stocks for yield.

Investors may find this surprising because the market has had an enormous run up in this period. The run up is almost entirely due to the increase in dividends which has been substantial and relentless. As a very rough rule of thumb, dividends have increased 1% each month or roughly 12% per year. The Table below provides the year over year increase in trailing twelve month dividends for the S&P 500 for each March 31 to March 31 period.

Source: Seeking Alpha

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