You read about such things in books; you gaze at the historical charts; but rarely do you live through such events in real time. Such is the nature of extremes in economic and financial cycles.
Reviewing history with the safety and objectivity of distance, it’s easy to pledge grand schemes for taking advantage of the great buying opportunities the next time they come around. But talk is cheap. Who among us would have the courage, the fortitude, the discipline, the temerity to buy stock in, say, 1932? Or 1974? Looking back, the timing was right, although that is obvious only with hindsight. Nonetheless, some mustered the discipline to buy in those and other dire moments. Yet such intrepid actions were–and always will be–the exception.
So it goes in times of crisis, which also describes the current predicament. It is the height of irony and frustration that the financial gods only extend great bargains when the broader financial and economic context looks darkest. Analyzing that recurring state of affairs is easy; acting on it is atypical, to say the least.
All of this comes to mind as we look at trailing dividend yields. The chart below graphically captures the drama in global equity markets of late, October’s close in particular. The trend needs no explanation. The question is whether the latest data points are compelling? And if not, why not?
We’ve discussed dividend yields before and so readers are encouraged to review the debate, including this post, and its predecessor here. No, trailing dividends aren’t a magic solution for easy profits, largely because only the past is revealed with full clarity. As such, dividend yields have been known to mislead us at times–sometimes it’s a trap. But not always. Trying to distinguish one from the other is what’s known as risk analysis. And risk is always lurking, including these ever-popular worries:
* Are dividend cuts coming, thereby diminishing the allure of the trailing yields? * Is inflation headed higher, which makes real dividend yields less attractive than they appear to be in nominal terms? * Will capital losses overwhelm dividends going forward?
And on and on we go. There’s always a reason to question an apparent gift. One might wonder why such worries are on everyone’s lips in a bear market but tend to be missing in action in a roaring bull market, but we’ll leave that for another day.
Meantime, it’s clear that we should always be suspicious of any one market metric in the absence of broader financial and economic context. Perspective comes in handy–always. But generally speaking, we like dividends, which is to say we enjoy receiving payments from our equity investments, and the more, the better.
Alas, we have no control over the absolute amount of dividends dispensed by our equity allocation. But we’re not completely at the mercy of Mr. Market. We do, still, have executive authority over the timing and the amount of equity investments, and that ain’t hay. It’s a power that’s fraught with risk, of course, but beggars can’t be choosy.
If we think of dividend payouts as coming at a price–a variable price through time–it should come as no shock to learn that we’re disposed to pay as little as possible for access to a stream of dividends. Presumably, no one on the planet disagrees with the concept overall. The details, in real time, are something else, and so explaining why it’s so hard to take advantage of yield opportunities is infinitely more complicated.
Originally published on November 10, 2008 at The Capital Spectator and reproduced here with the author’s permission.