The chart below shows the (indexed) value of the S&P from the beginning of 1920 to the end of 1940, together with the indexed value of dividends. Source is Robert Shiller’s database.
The takeaway is that while the stock index collapses from 30 to 5, i.e. to a fifth of its 1929 value, the dividend index falls from 1 to 0.5, i.e. to only a half.
This kind of result is fundamental to Shiller’s theory (for which he deservedly won the Nobel prize). In a nutshell, he used a time series of stock index, dividend index and long-term interest rates to work out the ex post ‘present’ value of the historical dividend stream. I.e. he worked out the present value of the dividends as it would have been in 1929 e.g., then considered how the ex ante stock index price compared with the ex post dividend present (i.e. 1929 present) value. He found that the forecast (the stock index) varied much more than than the outcome.
The current index collapse is nothing like the one subsequent to 1929. What will the fall in dividends be like?
We are about to find out. Eumaeus declares a conflict of interest here, given that a substantial portion of his pension is from dividends, but he will be scrupulous in reporting the results. March dividends are unaffected, as they were declared before the crisis. We shall see what happens in June.