The following on the currently low risk premium in the light of the current market. Since last week was the worst week for U.S. stock prices in four years, the author assumes some people may go hunting for stock bargains, and makes the case that stocks still are not at bargain prices.
Of course, this author does not know what's going to happen in the short or long run.
But I think that a critical flaw in this article is that it calculates the risk premium based on the P/E or pricer/earnings ratio. But a company's "earnings" -- even assuming they're not being manipulated -- is NOT what you the shareholder "get."
Oh, sure, in principal you "get" your proportionate share of those earnings, since legally speaking you are a owner of the company. But how can yhou spend that? YOu can't, unless you sacrifice your ownership by selling your shares.
Therefore, a much more logical place to start is with dividend yield. It's quite possible that with last week's and today's sell-offs, you can get good dividend-paying stocks at a lower price than two weeks ago, and therefore get a higher dividend yield than 2 weeks ago.
I say, go for it.
As for comparing the dividend yield to the interest rate on long term Treasury bonds, you must remember that stocks that pay dividends are an income growth form of investment. Your dividend yield is usually lower than the interest rate of Treasuries, but if you choose good companies with good businesses they will raise their dividend payouts over time. Furthermore, they won't stop paying you after 20 years, as Treasury bonds will.
income growth
income growth
Monday, March 5, 2007
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