Is it possible we can project a price target for the DIA using dividend yield? Consider the market may be entering an era of reduce growth expectations going forward. Could the market price the DJIA based on yield similar to a bond? What would be a fair price?
The following analysis uses a rather simplistic approach to estimate future value of the DIA using dividend yield and interest rates.
Reuters gives a 5 year dividend yield of 2.3% for the DIA. Shown on this chart in the green lines are dividend yields for 2014, as well as estimated dividend yields for 2015 and 2016.
The rolling 12 month dividend yield as of this month is 4.06 and at a yield of 2.3% equals $176.52, the level the DIA was trading in July. However considering monthly distributions range from 0.12 to 0.55, a year end annual 2015 dividend estimate of 3.77 is more in line with the annual dividend rate increase (5 year average) from Reuters. As of Friday's drop we are very close to this estimated dividend yield price level of 164.
Projecting forward into 2016 let's examine two scenarios. Scenario A with no rate increase for the foreseeable future. And scenario B pricing in the markets expectation of a + 0.25% rate increase from the Fed.
Scenario A estimates a 3.95 annual dividend (assuming the average annual dividend rate increase of 5.24% from Reuters) and assumes the average yield of 2.3% results a price target of $171.74 for 2016.
Scenario B estimates a 3.95 annual dividend but instead assumes the average yield will need to increase to 2.55% which results a lower price target of $154.90 for 2016. This would imply an additional drop of 5.76% from Friday's close.
Perhaps a possible third scenario not shown on the chart is the Fed could postpone any rate increase until 2017 or beyond?
As always any insight, analysis, or corrections you offer are appreciated. Best luck and trade to win!
The following analysis uses a rather simplistic approach to estimate future value of the DIA using dividend yield and interest rates.
Reuters gives a 5 year dividend yield of 2.3% for the DIA. Shown on this chart in the green lines are dividend yields for 2014, as well as estimated dividend yields for 2015 and 2016.
The rolling 12 month dividend yield as of this month is 4.06 and at a yield of 2.3% equals $176.52, the level the DIA was trading in July. However considering monthly distributions range from 0.12 to 0.55, a year end annual 2015 dividend estimate of 3.77 is more in line with the annual dividend rate increase (5 year average) from Reuters. As of Friday's drop we are very close to this estimated dividend yield price level of 164.
Projecting forward into 2016 let's examine two scenarios. Scenario A with no rate increase for the foreseeable future. And scenario B pricing in the markets expectation of a + 0.25% rate increase from the Fed.
Scenario A estimates a 3.95 annual dividend (assuming the average annual dividend rate increase of 5.24% from Reuters) and assumes the average yield of 2.3% results a price target of $171.74 for 2016.
Scenario B estimates a 3.95 annual dividend but instead assumes the average yield will need to increase to 2.55% which results a lower price target of $154.90 for 2016. This would imply an additional drop of 5.76% from Friday's close.
Perhaps a possible third scenario not shown on the chart is the Fed could postpone any rate increase until 2017 or beyond?
As always any insight, analysis, or corrections you offer are appreciated. Best luck and trade to win!