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Time To Remove Dividend Yield From Your Stock Screens?

Observations 13-April-2012

Since the LTRO announcement by the ECB in December, we have seen a big risk-on move in the markets. Equity markets around the globe, especially the high beta ones such as Europe and Emerging Markets.

Year to date the stocks that have benefitted the most from this, are the ones that got hit the most last year. So high risk stocks as measured by beta or high dispersion of EPS estimates have bounced back the most. Following these are the value stocks, the ones with low prices to book and low P/E ratios.

What hasn't worked is dividend yield. If your stock screen relies heavily on this metric, your screen would have probably lagged the market.

A lot of people talk up high dividend stocks, basing the bull case on the low level of returns from cash forcing people into high income stocks. Research from sell-side brokers that construct back tested stock screens shows dividend yield hasn't produced outperformance in the US over long time periods. The one plus point is that it tends to outperform when the S&P 500 is falling. The years 2000, 2008 and 2011 were the main periods of outperformance. The upshot of all this, is that of the many ways of screening an equity market, there are better ones than this. The recent rally is just one example of this.