A few Idea Farms ago we looked at a WisdomTree research piece by Schwartz that sorted emerging markets into high and low dividend years. This is of course backwards looking, but instructive nonetheless. They found that:
+ The average performance of the MSCI Emerging Markets Index during years following high dividend yield values was 33.03%, more than 31 full percentage points above the return following low dividend yield years.
+ The years following high trailing 12-month dividend yields had performances that averaged over 15 percentage points more than the average performance of all 24 calendar years. The years following low trailing 12-month dividend yields on average performed about 15 percentage points worse than the average performance of all 24 calendar years.
+ Four of the five best yearly return periods for the MSCI Emerging Markets Index followed trailing 12-month dividend yields that ranked among the five highest of all 24 calendar year returns. Notably, at the 2008 year-end, the dividend yield on the MSCI Emerging Markets Index was 4.75% (the highest value) and the 12-month forward return of the index was 79.02% (the highest 12-month forward return).
+ On the other hand, the lowest observed year-end trailing 12-month dividend yield for the MSCI Emerging Markets Index was observed on December 31, 1999, and it was followed by the second-worst of all 24 yearly returns studied, specifically -30.61%.
And figure below:
So I thought for fun we would run the same analysis in the US since 1872. For some perspective, that is 140 years of investing. We divide the years up into high and low dividends with the breakpoints being a 4.18% nominal yield and a 1.48% real yield.
If you invested in low dividend years your average return would have been 7.5% per annum nominal, 5.1% real.
If you invested in high dividend years your average return would have been 13.2% per annum nominal, 10.7% real.
Results are consistent for real yields as well.
The dividend yield at the end of 2012 was 2.19% nominal, 0.49% real.