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By Josh Peters, CFA | 01-19-2010 04:27 PM

What Dividend Yields Are Telling Us Today

The 2% dividend yield on the S&P 500 shows that stocks are relatively richly valued, says Morningstar's Josh Peters, but you can still make the market work for you.

Josh Peters: Hello, this is Josh Peters, editor of Morningstar DividendInvestor. Dividend-paying stocks have some wonderful attributes that just about any investor can appreciate. They generate income that you could use in your retirement or to build earning power for the future. Dividend increases provide very good signals that the company that you own is healthy. Just having the dividend itself shows you that the company has some cash or access to cash. As we can see from some past scandals, that's not always the case with reported earnings.

But what can we say about a market that, at least over the last couple of weeks, seems to have set a new post crash high just about every day? Is this a good time to be getting back in, or is the market too expensive? Should investors be waiting for a pullback?

Well, these kinds of questions apply to just about any kind of investor, whether they're looking for income or not. Dividends provide a useful framework to start thinking about some of these questions, even when we've come through such a turbulent period as the one we've just had.

Now we might start off by looking at what dividends are telling us right now. Well, the fact of the matter is that dividends are telling us about the same kinds of things they were telling us five or 10 years ago, which is that stock prices, relative to the amount of dividend income you can expect, are still relatively high.

You might think of it in terms of a P/E, with its dividend yield of the S&P 500 at about 2%, investors are paying 50 times dividend earnings for their portfolios for their investments. The good news is that not all companies have dividend yields as low as two percent.

It's not uncommon to find three, four, five, six percent even these days, and that provides an investor with the opportunity to get a lot more income for their dollar, which in turn, takes some of the pressure off of looking solely at price appreciation to drive your total returns.

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