Red herring - distracting attention from an issue by introducing an irrelevant issue or one that is only superficially related to the one being discussed.
I am not sure that is the right fallacy to be using here, but I am sure a fallacy is carried out when investors focus on dividend yields or buyback yield and neglect the true yield (Earnings or FCF Yield).
The equivalent canard in done in the return area when investors focus on dividend yield or buyback yield when they should be looking at total return (capital appreciation + income).
The yield (equity) investors should be concerned with is the earnings yield (not the dividend yield and/or the buyback yield).
With investors searching for, and in many cases chasing yield, they are often focused on the wrong thing.
Earnings yield translates into ROE.
Keep that in mind the next time someone wants to talk about dividends and yields. Yield chasers are making an error of false alternatives by neglecting to focus on total yield (aka Earnings Yield).
Showing posts with label dividends. Show all posts
Showing posts with label dividends. Show all posts
Thursday, March 12, 2015
Monday, February 23, 2015
The New Dividend Investing Approach Is The Same As The Old Dividend Investing Approach
QE and financial repression through ZIRP have pushed up prices and forced savers into riskier investments.
One area where investors are doing a deal with the devil is dividend paying stocks. Investors are being pushed up the risk curve (by pushing up prices), hoping that an investment in a dividend paying stock is better than a non-dividend paying stock and that such an approach serves as a proxy for bond yield. They are wrong on both accounts. Theory posits that there is no difference between a dividend paying stock and a non-dividend paying stock (Modigliani equivalence theorem). Evidence shows that when the market swoons, dividend paying stocks swoon just as much as non-dividend paying stocks. Equity risk is still equity risk. If it is true that ZIRP has artificially pushed up dividend stocks relative to non-dividend stocks, then there will be an additional cost to pay when valuations across the equity market equalize.
Hoping that dividend paying stocks provide a bond-like cushion with equity like appreciation is wishful thinking. There is no free lunch in the markets.
Additional Notes:
This is true of investors seeking dividend cover in tech stocks. I doubt they are fully factoring business risk.
It is especially important for investors to not be pennywise and pound foolish. Seeking a 3% yield vs a 2% yield for the market infers taking on additional risk. And it is especially important for investors to beware the addition of a 3% yield pales in significance to a 25% fall in price.
Finally, once dividend cuts come down the pike they have a double whammy effect wrt to falling dividend and falling price. What worked on the way up - increasing dividend, increasing price - works in reverse on the way down (as Cramer would say, "that is a house of pain")
One area where investors are doing a deal with the devil is dividend paying stocks. Investors are being pushed up the risk curve (by pushing up prices), hoping that an investment in a dividend paying stock is better than a non-dividend paying stock and that such an approach serves as a proxy for bond yield. They are wrong on both accounts. Theory posits that there is no difference between a dividend paying stock and a non-dividend paying stock (Modigliani equivalence theorem). Evidence shows that when the market swoons, dividend paying stocks swoon just as much as non-dividend paying stocks. Equity risk is still equity risk. If it is true that ZIRP has artificially pushed up dividend stocks relative to non-dividend stocks, then there will be an additional cost to pay when valuations across the equity market equalize.
Hoping that dividend paying stocks provide a bond-like cushion with equity like appreciation is wishful thinking. There is no free lunch in the markets.
Additional Notes:
This is true of investors seeking dividend cover in tech stocks. I doubt they are fully factoring business risk.
It is especially important for investors to not be pennywise and pound foolish. Seeking a 3% yield vs a 2% yield for the market infers taking on additional risk. And it is especially important for investors to beware the addition of a 3% yield pales in significance to a 25% fall in price.
Finally, once dividend cuts come down the pike they have a double whammy effect wrt to falling dividend and falling price. What worked on the way up - increasing dividend, increasing price - works in reverse on the way down (as Cramer would say, "that is a house of pain")
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