When someone says that the stock market looks expensive, often what he is saying is this: the current earnings yield that you are receiving is quite low. Of course, the total returns that you receive from an investment consist of two dominating variables: the earnings yield that you receive today, and the future growth rate that the company offers you thereafter.
The general concern right now is that companies that typically give you an initial earnings yield of 5-7% are currently giving you an earnings yield of 3-4% instead. Take something like Hershey chocolate. An absolutely excellent company, the kind of stock that once you buy, you never sell—letting the growing dividends that you receive every three months do the talking. Since becoming a large-cap chocolate manufacturer, Hershey’s fair stock valuation is usually when its stock trades at $20 for every dollar in profit that it makes, for a P/E … Read the rest of this article!
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