The Dividend Yield is another way to measure values in the stock market. This is the total dollar amount of the dividends paid on the DJIA stocks divided by the value of the DJIA.
Looking back at over 100 years of data for the DJIA, it is clear that stocks become over valued, i.e. too expensive, when their Dividend Yields are less than 4%. These low Dividend Yields represent major tops, and prices fall from there until Dividend Yields return to the long-term average of 6%, and then continue beyond that to a level where they are under valued, i.e. cheap, around 8-10%.
The 1929 top was formed at a DY of 3.5%, which resulted in a 3-year bear market that bottomed in 1932 at a DY of 17%.
The 1966 top was formed at a DY of 3.5%, which resulted in a 16-year bear market that bottomed in 1982 at a DY of 8%.
The 2000 top was formed at a DY of 1.2%; 66% lower than the top in 1929!! Currently, the DY stands at 2.5%, which is hardly cheap!! It is still beyond the level that formed the 1929 and 1966 tops!
History has shown that after a major top, a multi-year bear market should take prices back to a DY of about 10%, in order to work off the excesses of the previous bull market. This means that, by this measure, the DJIA should eventually drop to 3,500-4,000. That's when stocks will be cheap again!
http://www.thefinancialhelpcenter.com/Stock-Market/Are-Stocks-Cheap.html
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