Global Dividend Yield Trends

Dividend yields don't tell you everything, but they tell you a lot - sometimes.

A fair number of studies over the years find that the correlation between yield and subsequent return over the next five years and beyond is strong enough to convince fair-minded investors to watch those yields for clues about what's coming. In other words, higher yields have a tendency to lead to higher returns, while lower yields imply lower returns.

No, it's not absolute. Nothing ever is in finance. That caveat aside, favoring markets, and points in time when yields are relatively higher has a tendency to improve the odds of capturing higher total returns in the years ahead. In fact, this is an old idea, captured in Ben Graham's famous counsel that the market is a voting machine in the short run and a weighing machine in the long run. By that he meant that speculators rule now, tomorrow, next week and even next year when it comes to setting prices. But over longer periods, certainly five years or more, valuation dictates price. And dividend yield has proven to be an especially robust signal of expected returns.

With that in mind, we present two charts, each telling different stories. The first chart below graphs the dividend yield history for the world's developed markets. Although the absolute levels vary, the trend of late has been consistent across regions: yields are up. That's a function of the fact that prices have fallen relative to levels of a year ago.

click to enlarge

In contrast, emerging market equity yields generally have continued slipping, which is due to the fact that stock markets in the developing world have trended higher even as corrections roiled the developed world.

click to enlarge

Looking at market prospects solely on the basis of dividend yields suggests owning only developed world stocks and shunning emerging market equities. But if we consider growth opportunities, the emerging markets don't look too shabby after all. In fact, they look quite a bit better than the outlook for the developed world. All of which implies that an exposure to emerging markets is warranted, even if yields are uninspiring.

Perhaps the key question is whether this is a good time to overweight emerging markets? Dividend yields suggest the answer is no, or at least that this is no time for overweighting these stocks. The case for caution is strengthened when you consider that emerging market stocks have been spared a correction, at least relative to the developed markets.

Then again, much depends on one's time horizon. Traders will no doubt dismiss the counsel to stay wary on emerging markets. But for long-term investors, the case for caution may carry more influence.

To invoke Graham's metaphor, it's time to ask if you're planning on voting or weighing.

Comments

[nickgogerty]

dividends are subject to corporate policy. it would be interesting to see free cash flow or even earnings over time in this study.

[sorgmot]

Thank you for the great graphs. We believe that dividend yields show what the market demands. Dividends support stock valuation by giving stockholders something for their money investment. The great collapse of stock prices in 2000 to 2003 resulted form the lack of dividends to support prices.

There is more to the graphs which should be of interest to those who buy, sell, and own stocks.

!. The pattern of yields responds to the business cycle and rises when business are exposed to recession periods because price to earnings ratios fall in recessions as investors become more skeptical of growth in future earnings and want more dividend yield in compensation.

2. The long-term trend in rising price to earnings ratios and thus declining dividend ratios from 1980 to 2000 has reversed since 2000. This has placed dividend rations to stock prices in a new long term uptrend with cyclical oscillations. That means the stock price to earning ratios are now in a long-term down trend with dividends now as important or more important than earning to investors.

These changes call for massive firings of board of director and company officers who are looting any company and its shareholders of cash and are really incapable of doing anything else.

[buyitcheap]

What happens when these low dividend tax rates go back to the old rates prior to the various tax relief efforts of Bush and company?

Do those payout policies change in favor of capital gains? If so, would dividend cuts then be seen as a negative with corresponding negative impact on the stock price?

[Dividend Growth Investor]

That's a very good question buyitcheap and it concerns a lot of investors out there.
My belief is that certain companies, which have paid dividends consistently for over one decade would not cut their payments. Companies used to pay dividends for several decades even before the 2003 act. For example XOM has paid dividends since 1911. I don't see management changing this policy.
The few companies that have started paying out dividends due to the 2003 act, are a wild card however. If a company cuts dividends simply because the tax act expired, I would stay away from this stock. If you are a long-term investor like me, you are interested in long-term performance and not short-term financial maneuvring.
Companies like JNJ, which has increased dividends for over 4 decades are the ones which won't likely be affected by the tax expiration.

[THofler]

I agree with the jist of DGI's comments, except I think it is a little ironic that he singled out XOM which has a payout ratio of only 18%. I believe that XOM has been increasing the div. at about 8%/yr while earnings growth has been much greater. Nearly all of the oil majors have better or much better yield: BP, E, TOT, COP, CVX.

I think that XOM has prefered to increase its share buybacks instead of substantial div. increases. Why? Maybe they believe (correctly?) that the current 15% div. tax rate is a flash in the pan & that in the long run investors will thank them for sparing them from a crushingly high div. tax.

[Dividend Growth Investor]

Thofler,

With the aging of the population, dividend investing will transform itself form a niche market to a major market for investments. If you are retired, dividend income investing might sound appealing to you, because it offers you the possiblity to get an inflation adjusted income stream as well as some capital gains. If companies spend a ton on share buybacks, the only way that investors will make money in the stock is from capital gains, which i believe is taxed higher than dividends currently. Even if the dividend tax is equal to the capital gains tax, you are better off with dividends, because you don't have the brokerage costs associated with selling a stock. You also have the possibility of selling your stock at rock bottom prices when fundamentals and the market are out of sync. With dividends however, you will keep getting your payments, even if the street believes the company is in trouble, when it actually isn't.

I think that XOM is buying back its stock rather than dramatically increasing its dividend because its management doesn't believe that oil prices will stay high for a long period of time. Companies could start and stop share buyback as they want, there is no urgency in consistency of buybacks in my opinion. With dividends, on the other hand, companies prefer to be consistent. When a company cuts its share buyback, not a lot of folks notice that; if you cut your dividend though, everyone notices that and executives lose jobs..