MacroMicro calculated the correlation between the price-earnings ratio/dividend yield of the MSCI indices for multiple countries over the past 20 years and their potential return rates in the next five years. Countries can be divided into the three categories based on how future returns may be correlated with the two indicators:
1. Negatively correlated with P/E ratio, positively correlated with dividend yield: the United States, China , India, Indonesia, Philippines, Mexico, Colombia, Peru
2. Not correlated with P/E ratio, positively correlated with dividend yield: Japan, Germany, France, Hong Kong, Singapore, Taiwan, South Korea, New Zealand, Malaysia, South Africa
3. Low or no correlation with P/E ratio or dividend yield: the UK, Canada, Spain, Australia, Thailand, Brazil, Chile, Turkiye, Russia
Note: Italy is an outlier among the countries, as the price-to-earnings ratio of the MSCI Italy Index is positively correlated with expected returns and negatively correlated with dividend yield.
Legends
Price-to-Earnings Ratio (horizontal axis): Stock price / Cumulative earnings per share (EPS) over the past 12 months The indicator measures whether a stock is priced reasonably or if it is cheap or expensive. For this indicator, the upper limit displayed in the chart is 50.
Dividend Yield (vertical axis): (Dividend per share over the past 12 months / Stock price)*100% This metric measures the annual dividend returns investors can get back from their investment. The upper boundary of the chart is set at 10%.
The dotted lines represent the long-term average P/E ratio and dividend yield of the MSCI World Index, which is 20x and 2% respectively.
Note: When looking at P/E ratios and dividend yields, other factors such as industry characteristics, historical values, growth potential, and opportunity cost (e.g., bond yield) should also be considered. A low P/E ratio sometimes suggest the market does not fully appreciate the industry's value. And although a high dividend yield means decent dividend payments, if the share price falls below the stock's purchase price, the price decline could offset the dividends and result in a net loss. Therefore, it is important to consider other factors.
