A Personal Finance and Investment Arm of The Business Times


The Chase for Yield – Elusive Returns? by Roger Montgomery

This White Paper provides investors with some of our thoughts about the current emphasis on yield and whether dividend yields are an appropriate measure of value or returns.

If we want to be consistently successful investors then we should find the most successful investor we can and mimic what he or she does. Today, those investors hungry for yield and chasing dividends should note that I have yet to uncover a billionaire investor that achieved their success from focusing on high dividend yield stocks - a little like the salmon that swims downstream, it just doesn't work over the long run.

In the press today there are many stocks we would class as dogs that are being purchased enthusiastically amid the hunt for yield or the fear of missing out.

Dividend yield is the percentage return, calculated by dividing the annual dividend paid on a share by its current price. The dividend yield is obviously informative but what I am interested in is whether it can be used as a sole determinant in justifying an investment.

And the reason I am interested? Because right now, it is being used this way.

Interest rates today on cash and term deposits are so low that even a million dollars earns just $45,000 of income a year and that’s before tax. This is not enough for most people. There was a time that having a million dollars meant you were rich beyond the dreams of most people, and indeed it is still a lot of money, but if you are retired and your life savings are earning you just $45,000 in a term deposit or $30,000 if you are invested in bank bills – can you survive for another fifteen or twenty years? Inflation will ensure you will be dining in far less salubrious restaurants in a decade’s time so, much like rats jumping off a sinking ship, funds are being transferred from bank accounts, term deposits and bank bills to share trading accounts, Exchanged Traded Funds and Managed Funds.

The mad race for higher incomes is well and truly underway and it is being encouraged by the world’s central banks from the US, to Australia and to Japan. Higher stock prices equal confidence. Confidence equals spending. Spending equals growth.

But does chasing yield in the sharemarket work?

To read more, please download the PDF here.