Published Sat, 11 Apr 2020 01:39:00 -0400 on Seeking Alpha
As interest rates remain mired at generational lows, it's more challenging than ever for those who need income to find it without taking undue risk.
There will be many occasions when the market appears to be offering a “free lunch,” high yield without high risk.
Closer examination will reveal many of these situations to be mirages. But not always...
Sometimes, there will be opportunities to improve one's yield-risk balance.
Expecting to find a "free lunch" in the market (returns potential that exceeds risk) has pejorative connotations, but in reality, anybody who doesn't strictly adhere to the efficient market theory is, one way or another, trying to accomplish that very thing. In the income area, aggressive practitioners of this approach can expect to hear such phrases as "yield hog" or "sucker yield" and wind up guilty as charged as eye-catching yields turn phantom when dividends get slashed or omitted due to previously-discoverable but often overlooked company financial challenges. Yet with market interest rates still historically low and many investors and advisory clients needing income, the quest for yield can't easily be abandoned. That adds pressure to turn over more rocks looking for potential traps.
© Can Stock Photo / alphaspirit
The Yield-Total Return Conundrum The sucker-yield phenomenon, the inverse relationship between current yield and realized future return, is genuine. Fama-French documented it back in 1988, and I've seen it myself many times; Table 1 shows results of some examples. (Notice that even in the March 2020 crash, high yield did not serve as a protective shield against outsized losses).
The silver lining in this is that the market itself is fairly adept at recognizing dividend-safety risk, something that is not always as recognizable in standard metrics, such as the payout ratio, as many suppose. This is especially crucial for assessment of income-oriented ETFs where stock-centric data can be... Read more
|Stock name||Last trade||P/E||Earnings/Share||Dividend/Share||Dividend yield|
|ISHARES DOW JONES SELECT DIVIDEND INDEX FUND||103.22||0.0||0.00||3.37||3.31|
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