A rethink of dividend yield

This post is an inspiration from these disclaimer lines, such as ‘Dividend is not guaranteed’.

Shall I say, given the backgrop of:

?a. Sony Walkman, PC, and the Oil Crisis (Japan, Chip (not a genre of food), and Regional Conflicts) – And, long-run average of fed funds effective rate from 1954 to 2024 is 4.6% (albeit this is an apple vs. orange comparison). What I am trying to say here is, one might as well factor in Nassim Nicholas Taleb’s ‘risks that are realistic, risks you can think of, and risks that have never come across your mind’ in their thought process in this, cliché as it may, an ever-changing world. Feel free to let me know, if there is an insurtech solution that could forecast a ship running into a bridge or an oil spill in a nearby river overnight (not that I am saying automation is an oxymoron in itself) #FatTails

b. 3% seems to be a magical number for stock-bond correlation over the years (See screenshot - Cr Schroders (https://www.schroders.com/en-au/au/adviser/insights/why-is-there-a-negative-correlation-between-equities-and-bonds/).

c. On a very general basis, investment-linked ‘capital light’ #insurance products would start to gradually take over when interest rates normalise. It is also worth pondering that there is a loss of relevance with investors in this industry, particularly for listed life insurers on the whole over the years, as pointed out by McKinsey last year, “… ?in the United States, where the largest US life insurers’ share of market capitalization relative to other financial-services peers has decreased over the past 35 years—from 40 percent in 1985 to 17 percent in 2005 to only 9 percent in 2020.” (https://www.mckinsey.com/industries/financial-services/our-insights/global-insurance-report-2023-reimagining-life-insurance)

It is crucial to talk about #dividend strategy again. As a young (very young) value protégé, it is also a canon event. In corporate terms, absolute return strategy has a place now, and will have a place in the foreseeable future to smoothen, e.g. a. localisation b. overly-crowded trades amid passive vehicles are now becoming (have become) the ‘main characters’ (whether there is a correlation or causation is not for me to say or judge. I personally believe Mr market would endorse vigilantism at some point - not that this is necessarily my stance). I don’t have a crystal ball, and thus not in the position of answering ‘Is it the time to sell/buy?’ (not that I am skilled enough, to be fair). However, I believe one might as well have an idea of where they stand and how things might ‘transpire’.

As a starting point, I would love to explain the rationale of introducing a dividend payout ratio is based on the arithmetical fact that - dividend payout ratio (dividend per share/earning per share) = dividend yield (dividend per share/price per share) * pe ratio (price per share/earnings per share). FYI: See chart - Relevance-wise does not look that good…

Observations are simple:

a. 1) A higher ‘yield’ might be the result of a lower share price (denominator effect) 2) A higher ‘yield’ might lead to a lower payout ratio (i.e., You do not get much at all).

b. 1) A lower PE ratio might have a coexisting higher ‘yield’ (denominator effect?) 2) Always be aware of a value trap.

Source: Hang Seng Insurance Theme Index (Excl. Banks) & Own Calculations – See Bubble Charts. Data ranges from 2019 to 2023.

The key take - A portfolio of ‘stock selections’ in an industry or a sector that is based primarily (sometimes even solely) on ‘dividend yield’ would perhaps make one sceptical, and worth a deeper dive (particularly given the nature of a sell-side business model ??).

?

PS:

a. #PowerQuery is fun … (not an interesting habit ??).

b. This post is essentially a disclaimer of opinion ??.