Low Yields Renew Debate Over Dividends’ Importance

Anyone who suffered through the miserable stock market of 1994, earned his or her just reward in the first half of 1995, when the Dow Jones Industrial Average and the Standard & Poor’s 500 index each jumped more than 18 percent.

But now there are signs the economy is slowing. Most experts seem to think corporate earnings will level off or decline. To pessimists, this is proof stocks must decline.

One of the hand-wringers’ favorite statistics is dividend yield, the ratio between a company’s dividend payment and its stock price.

The collective dividend yield of the S&P 500 stocks now equals 2.6 percent, based on estimates of the stocks’ 1995 payouts. That’s well below the 3 percent level that’s generally considered the bottom of the safe zone.

The worriers reason that, when dividend yield goes below 3 percent, investors prefer safer, better-paying investments such as money market funds and CDs.

But you needn’t rush out and sell everything, says Abby Joseph Cohen, market strategist at Goldman Sachs. Cohen recently has expanded on an argument that’s been kicking around the industry for a few years: that dividend yield isn’t the market indicator it’s cracked up to be.