Long Term SP500 Equity Yield

The long term equity yield $r$ can be derived from the Gordon model formula with steady state growth and dividends: $$P = \frac{D}{r-g} = $\frac{P r_d}{r-g}$$ The equity yield $r$ can be thus decomposed into the dividend yield $r_d$ and earnings growth $g$. $$r = r_d +g$$ The real yield is deflated by the CPI growth over the period. We use Schiller data to estimate these.

While we observe significant fluctuations with a 10Y window for earnings growth, using a 30Y window helps smooth out the earnings.

We see that the dividend yield $r_d$ has gone down after the 60s as markets repriced equities higher as they are better inflation protected than bonds. Growth $g$ has picked after that. It is not clear which part is due to more productive investment, and which part comes from shares buybacks increasing the earnings per share of the index.