P/E & Yield relationship

Discussion in 'Trading' started by drukes1234, May 9, 2006.

  1. I was reading an article today that stated every single secular bull market (not little cyclical 3 yr bulls etc) in the s&p has started with a P/E ratio that was very close to it's yield, for example the s&p was trading at 11 times and the yield was 10.

    Has anyone investigated this and does anyone know if this works on individual equities?

    If it does work on individual equities then the following stocks are buys.

    PCU and F
  2. ?
  3. Earnings yield is the reciprocal of P/E ratio. So earnings yield in percent will be equal to P/E ratio if the P/E ratio is exactly 10.

    Presumably you mean dividend yield. The payout ratio on the S&P 500 is about 35%. So you would need a P/E ratio of 6 to equal dividend yield of 6%. That would be a great buy - S&P 500 at 418!

    For stocks, there's all kinds of reasons why a stock might meet this screen but still be a bad buy: over 100% pay out ratio, short asset life, highly cyclical industry, financial distress, etc.

    I can't believe I'm taking this seriously. :)