The Myth of the Earnings Yield

AbstractA very slim minority of firms distribute dividends . This truism has revolutionary implications. In the absence of dividends, the basis of most - if not all - of the financial theories we use to determine the value of the shares , is distorted . These theories are based on some implicit and explicit assumptions :That the (basic ) "value " of a share is closely correlated (or even the same) its market position (market or transaction) price ;The price movements ( and volatility) are mostly random when correlated in the (basic ) "value" of the stock (always converge on this " value " in the long term );That this fundamental " value " answers and reflects new information efficiently ( old information is fully incorporated in the Act).Investors to the power of all future income from the share ( with one of a plurality of possible rates - all hotly disputed ) discount. Only dividends form meaningful income and because only a few companies in the distribution of dividends to engage theorists were forced to " paid " with "expected" dividends rather than deal ones . The best indicator of the expected dividends is the result. The higher the profit - and the more likely the higher the dividends. Also retained earnings are considered deferred dividends. Retained earnings are reinvested , the investments generate profits and in turn increase the likelihood and size of the expected dividends. The result - if not yet distributed - with the result yields and other measures - were wrongly translated to a return yield . It is as if these earnings were distributed and created a RETURN - in other words , an income - for the investor.The reason for the continuation of this is misleading, that according to all current theories of finance, in the absence of dividends - shares are worthless . If an investor is likely never receive income from his investments - then its stocks are worthless . Capital gains - the other type of income from investment - is also driven by the result , but it does not function in financial equations.However , these theories and equations in stark contrast to market conditions.People do not buy stocks because they expect a stream of future income in the form of dividends. Everyone knows that dividends are quickly becoming a thing of the past. Instead, investors buy stocks because they later sell them to other investors hope for a higher price . In other words, investors expect a return on their investments , but in the form of capital gains realized. The price of a share reflects the discounted expected return ( the discount rate being its volatility ) - NOT the discounted future stream of income. The volatility of a stock ( and the distribution of prizes) , which in turn is a measure of expectations regarding the availability of willing and able buyers (investors) . Thus, the expected capital gains of a basic element ( the expected return value) for volatility (the latter is a measure of the expectations regarding the distribution of the availability of willing and in a position where price per customer class) consisted adjusted . Results come into the picture only as a benchmark , calibrator , a benchmark . Capital gains are created when the value of the company whose shares are traded increased. Such an increase is more often than not with the future stream of income for the company (NOT to the shareholder ! ) Correlates . This strong correlation is what binds together income and capital gains . There is a link - that could be causing and yet not . But in each case the result is a good proxy for capital income is not subject to appeal .And that's why investors are obsessed with profit figures . Not because higher profits mean higher dividends now or at any time in the future . But because the results are an excellent predictor of the future value of the company and thus the expected return . Put more clearly : The higher the score , the higher the market valuation of the company , the greater the willingness of investors , the higher to purchase the shares at a higher price , the investment income . Again, this is not a causal chain can be strong , but the correlation.This is a philosophical shift from "rational" measures (such as fundamental analysis of future income ) to " irrational" ones ( the future value of the equity interest to different types of investors). It is a transition from an efficient market ( all new information is immediately available to all rational investors and is included in the price of the share is added immediately ) to an inefficient one ( always the most important information is missing or lacking : how many investors want to share a specific price to buy at any given time ) .An income -driven market is "open" in the sense that it depends on newly acquired information and respond to them efficiently ( it is very liquid) . But it is also " closed " because it is a zero sum game , even in the absence of mechanisms for selling it short. An investor gain is another's loss, and all investors are always on the hunt for bargains (for what is a bargain can be evaluated " objectively " and regardless of the state of mind of the player ) . The distribution of gains and losses is pretty even . The general price level amplitudes around an anchor .A market driven capital gains is "open" in the sense that it refers to new flows of capital (to new investors) is dependent. As long as new money keeps pouring in, capital gains will be maintained and realized expectations . But the amount of such money is finite, and in this sense , the market is "closed." After the exhaustion of available funding sources, tends to burst the bubble and the general price level implodes , without soil . This is often called a " pyramid scheme " or more politely , described a " speculative bubble " . Therefore, portfolio models (CAPM and others) are unlikely to work . Diversification is useless if shares and markets move in tandem ( contagion ) and they move in tandem because they are all influenced by one critical factor - and only on one factor - the availability of future buyers at given prices.Sam Vaknin is the author of " Malignant Self Love - Narcissism Revisited " and " After the Rain - How the West Lost the East" . He is a columnist in " Central Europe Review " , United Press International ( UPI) and ebookweb.org and the editor of mental health and Central East Europe categories in The Open Directory, Suite101 and searcheurope.com . Until recently , he served as Economic Advisor to the Government of Macedonia.