With dividend yield stocks in short supply, differentiating between winners and losers acquires more importance, according to Societe Generale SA (EPA:GLE)’s Global Income Investor Report.
Nomad Investment Partnership: Keep An Eye On The Unseen Risks
There are many ways to define risk. Warren Buffett has said that "risk comes from not knowing what you're doing." Q3 2020 hedge fund letters, conferences and more His mentor, Benjamin Graham, believed that risk should be measured as the chance of a permanent capital impairment of an investment. Seth Klarman also holds this view. Read More
In its Global Quantitative Research report published this week, Andrew Lapthorne and team observe that May saw record inflows of US$3.7 billion into Dividend Income ETP funds, catapulting the year-to-date inflows into a record-breaking US$14.5 billion.
Equity Income Universe is Shrinking
The dividend yield strategies provided a remarkable resilience during the last year and caught the attention of several investors. This overcrowded market has pushed the segment into excessive valuations.
Analysts are confident that the higher prices, not supported by matching improvement in fundamentals, make the equity income universe a shrinking opportunity.
The Global Income Investor Report also finds the U.S. equity market making a come-back to its pre-crisis peak, with dividend payments almost higher by 20 percent. However, Japan and the Eurozone still remain depressed and dividend payments are also nearly back to pre-crisis levels.
Such polarization is markedly visible in the dividend yield world as depicted in the graph below:
The report also notes low quality stocks were rising sharply, while high quality stocks were being sold off. This made the SG Quality Income Index declining 3.9 percent during May, posting one of the worst absolute performances since 2009.
Importance Of Dividend Yield Stocks
According to the Global Quantitative Research Report, an investor focusing on higher dividend yielding stocks over the longer-term would have seen market outperformance return on a total return basis. Besides, such a strategy would have enabled him to beat a World ex-U.S. benchmark 85 percent of the time when measured on a three year rolling basis.
The report also finds that dividend growth, dividend volatility and consensus dividend revisions are useful yardsticks to prevent getting trapped in laggards, particularly in Europe.
According to the report, dividend yield, dividend growth and inflation provide the bulk of equity returns over time. Besides, dividend growth offers some degree of inflation protection to an investor.
Further, Andrew Lapthorne and team feel, on a relative basis, with a lower beta and more cautious characteristics, equity income should outperform during periods of weak market performance. The analysts also observe that the compounding effect of a reinvested dividend is very often under-estimated by investors.
The analysts, however, cautioned that in the absence of dividend payments, the price performance of a high dividend yielding strategy can be very disappointing to investors.
The report also highlights that companies which buyback 3 percent or more of their share capital outperform only sporadically. After adjustments for foregone interest income net of dividend savings, buybacks since 2000 have provided 0 percent benefit to the stock price.
We also discussed earlier a strategy to construct a dividend growth portfolio.Finding value stocks in the energy sector has also been analyzed recently.
Andrew Lapthorne and team at Societe Generale SA (EPA:GLE) also compiled a database of current global equity income funds, after scanning about 3000 global funds. The report briefly analyzed the top 40 most important dividend payers. The analysts feel technology stocks could easily afford to pay more in dividends.