Broad Market Indicator #9: Dow Price to Dividend Ratio

This indicator measures what it costs to buy a dollar’s worth of dividend. It is a very long indicator and could signal action a year in advance. Do not use this indicator alone! Combine it with the others.

How to calculate:

1. Obtain the current yield on the DJIA
2. Get the DJIA close number for the week.
3. Multiply the results of #1 and #2.
4. Divide by the close #.

So the formula is simple and looks like this: 

               (“DJIA Yield” x “DJIA Close” ) / “DJIA Close”.

For the week ending 01/01/2016, the result is 39.22 and is considered overvalued.
Here’s how we get there (2.55% x 17425)/ 17265 = 39.37

I use Barron’s site to get my data at this link.

Here is a chart to illustrate the valuation metrics.

Price/ Dividend Ratio	Resulting Interpretation
14 to 17	Bargain
26 to 29	Dangerous
Above 29	Extremely Overvalued