The hunt for yield

I recently read an article about dividend yields and the correlation between yield and share value. Investors such as myself are attracted to shares paying strong and sustainable dividends. It has also been argued that dividend yield is a stronger indicator of value than the perennial price/earnings ratio (P/E).

Currently, bank deposits are paying between 1.5% to 2% with no capital appreciation, government bonds fare a little better with closer to 3% yields with equities offering reliable and stable yields ranging from 4% to 6% with the possibility of capital appreciation. Then there is the franking credits of dividend imputation, that is a strong incentive to chase high yielding equities.

This strategy is enhanced in the low interest rate environment brought about by central banks to stimulate growth with quantitative easing strategies. One has to be careful as dividend yield may rise as share prices plummet without earnings per share (EPS) and dividend per share (DPS) revaluations. In such a case, share price growth still correlates P/E ratios with rising EPS and DPS mirroring revenue growth.

With more people setting up self managed superannuation funds (SMSF) as baby boomers are nearing retirement, the search for yield whilst protecting capital is a huge consideration. For me, it certainly is as my strategy revolves around generating a future income stream whilst currently reinvesting dividends as a compound interest strategy.

We are tired of fund managers not only unable to beat a market index but also charging outrageous fees to underperform benchmarks. We are able to outperform fund managers although the average SMSF does lack the diversity of retail funds.

That is mainly due to the requirement of a critical mass for each investment, yes diversification is good but if each individual investment is so small that even a doubling of capital ensures such a small return that people can't live on in the future then it just isn't worthwhile.