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In 2018 Shiller developed an alternative to CAPE, in his own words:
“As of September 2018, I now also include an alternative version of CAPE that is somewhat different. As documented in Bunn & Shiller (2014) and Jivraj and Shiller (2017), changes in corporate payout policy (i. e. share repurchases rather than dividends have now become a dominant approach in the United States for cash distribution to shareholders) may affect the level of the CAPE ratio through changing the growth rate of earnings per share. This subsequently may affect the average of the real earnings per share used in the CAPE ratio. A total return CAPE corrects for this bias through reinvesting dividends into the price index and appropriately scaling the earnings per share.”
I haven’t seen much coverage of this alternate metric. What are the pros and cons of using total return rather than earnings for a valuation metric, for someone planning to use a CAPE-based SWR strategy?
Need to research more, but does make sense.
Also the shift in economy to less capital intensive industries should support higher CAPE. Swapping a tech company for a railroad would instantly support higher CAPE.
However CAPE us still likely valid over shorter ranges. I like idea of where is CAPE versus last 20 years vice full data set.
It's definitely worthwhile to use an adjustment to account for varying dividend payout environments. The adjusted CAPE is still very high in absolute terms, of course. So, using the new CAPE you're still very elevated rather than crazy-elevated when measured by the old CAPE.