Bring on the Dividends

If you want more proof that stocks aren't expensive, look no further than dividends.

Right now, companies are paying out dividends in a big way. Not only are more firms paying dividends to shareholders, but the dividend yield of the S&P 500 is currently at the highest sustained level it's been in since the early 1990s.

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Perhaps most important, this is all happening in the context of a near-zero interest rate environment. For the first time in more than four decades, the S&P's dividend yield is higher than the yield on five-year treasuries. So not only are stocks performing well on a capital gains basis, they're also cutting bigger income checks than fixed-income investments.

And firms are doing it all with a payout ratio that's around the historic median.

So no, stocks aren't overpriced. They're just not as absurdly dirt-cheap as they were back in 2009.

Too Far, Too Fast

If stocks aren't overpriced, couldn't they still be moving too far, too fast?

Since the market bottomed in March 2009, the S&P 500 has rallied a staggering 160%. That's certainly far, and it's certainly fast, but the new highs in stocks are sustainable.

In fact, making new highs is the stock market's normal mode. Since 1950, 60% of all S&P 500 trading days have been within 10% of an all-time high. And since 1982, 46% of all days were within 5% of an all-time high. Limited to bull markets, those numbers are even higher.

When stocks are in bull mode (as they are now), prices tend to consolidate near the highs. We just managed to forget that over the last five years of playing catch-up in stock prices.

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High prices aren't just sustainable, they're where the market's normal mode.

A Rollover in Stock Prices?

December hasn't been kind to stocks, especially considering it's historically a great month for equity performance. But let's put things in context here: The 1.15% correction in stock prices isn't exactly the bloodbath it's been made out to be.

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