The Political Calculations website recently detailed the relationship between the value of the S&P 500 Index and dividends per share going back to 1871. One conclusion drawn from the analysis is
over "long periods of time...the relationship between the S&P 500's index value and its dividends per share nearly parallel [each other from a] long-term trend perspective."
One will need to read the entire article to see the graphic representation of some trend and regression analysis. However, the data indicates:
"what the presence of so many straight lines tells us is that for long stretches of time, the ratio of the growth rates of price per share and dividends per share may be treated as a constant (emphasis added) during the periods where these lines exist.
"...the value that investors have placed on stocks has generally increased faster than the value they can expect to receive in dividends over time.
"This makes sense when you consider that the rate of dividend growth reflects only the rate of growth of company earnings that the boards of directors feel can be sustained for the foreseeable future. In addition to this additional earnings component, there are also a number of intangible components that may factor into investor valuations, including the value of the companies' brands, intellectual property, future expectations, etc., all of which add to the typical premium that investors are willing to pay for stocks.
"More than this, this premium in the growth rate of stocks compared to the growth rate of dividends explains why dividend yields have decreased over time, and to a lesser extent, why the price earnings ratio itself has tended to increase over time. It's a mathematically inevitable outcome of how investor's have historically valued stocks with respect to dividends (or rather, sustainable earnings.)"
The Sun, in the Center
December 6, 2007