The S&P 500 Index has had a strong 16.2% average annual return for the past five years,1 making it a very difficult index to beat. However, it is worth noting that broad measures of U.S. mid-cap equities have actually performed even better over the same period2:
• WisdomTree MidCap Earnings Index3: 18.8% per year.
• S&P MidCap 400 Index4: 17.0% per year.
• Russell Midcap Index5: 17.7% per year.
Now, with such great performance comes the inevitable question: Are U.S. stocks becoming expensive?
If Fundamentals Are Growing, Value Is Easier to Find
The typical way to answer this question is to cite price-to-earnings (P/E) ratios and examine the relationship between share price and earnings per share. However, there are many fundamental metrics that can be used to look at valuation. One that we focus on often is dividends.
Dividend Growth since the Global Financial Crisis Has Been Exceptional
At WisdomTree, we spend a lot of time looking at dividend trends around the world, and one of the first things we point out to people when talking about U.S. markets is that even though the performance has been strong, the dividend growth has been stronger. Putting the above-average share price performance into context, we can therefore tie it back to above-average dividend growth.
Dividend Growth and the Price-to-Dividend Ratio
The price-to-dividend ratio is no different than the price-to-earnings ratio—it simply looks at share price relative to dividends instead of looking at share price relative to earnings. In both ratios, if the underlying fundamental is increasing faster than the price levels, the ratio will become less expensive.