Dividend payout ratio = Dividends / Net Income, a measure of how much of the corporate earnings are paid out in cash dividends.
This ratio oscillates from low to high through the economic cycle. As the economy slows down, net income comes under pressure, but companies are hesitant to cut their dividends. In this slowdown part of the cycle, companies bravely (or stupidly) maintain their dividends, or even raise them to demonstrate it's business as usual.
If companies increase dividends without having the underlying earnings growth, this causes the dividend payout ratio to creep higher. This is what's happening now. S&P 500 data shows that actual corporate earnings peaked a year ago, in mid 2012. While companies are now paying out more in dividends, their earnings are trending downwards. This chart is from FactSet as of March 28, 2013.
From this data, the dividend payout ratio seems to be past its lowest point and is now rising. And earnings are currently in a down-trend, suggesting the economy is slowing. The previous two bear markets began within one year of this inflection. Of course, no two runs through the business cycle are identical, and this time we have historically unprecedented stimulus and QE.
Perhaps the stimulus will delay the latter part of the cycle, but I don't think it's stopping the cycle from happening. I'll go out on a limb and say that I expect the bear market to arrive by April 2014.
- Perpetual Bull, email@example.com