04 Jul Buy Dividend Yield; Buy Volatility
Market cognoscenti have been highlighting the need for yield in the current low-return environment. Expectations of “lower for longer” became firmly entrenched after the June 23rd referendum by British voters to exit the European Union (“Brexit”). Assuming that an investor prefers to (or must) invest in equities, dividend yield (annual dividend/price) is the focal point.
Does a focus on dividend yield make sense? It may not be a bad idea, especially if you expect the following conditions to predominate:
- low equity return environment
- USD appreciates and/or there is extraordinary currency volatility
- persistent, above-average equity market volatility
The scatter plots below show the monthly returns over a 30-year period starting in 1975 for the S&P 500 and the trade-weighted US$ relative to the average return attributable to dividend yield for the broad market. Relative to the S&P 500, the estimated trend line is convex and implies that exposure to dividend yield may be helpful to a portfolio when volatility is at relatively high levels.
Source: Sennosen LLC; Yahoo Finance
Likewise, when considering changes in the US$, dividend yield exposure trends positive when there are extraordinary positive and negative moves in the trade-weighted US$.
Source: Sennosen LLC; Federal Reserve Bank of St. Louis
Note: Regarding the scatter plots, the objective is to observe how changes in the market and US$ relate to changes in the return to dividend yield.