Saturday, January 10, 2015

Dividend Payers Underperformed Non Payers In 2014 And Equal Weighted Risk

The chase for yield in 2014 did not lead to the dividend payers in the S&P 500 Index to outperform the non-payers. As the below table shows, the average return of the payers, 14.99%, fell just short of the average return of the non-payers that generated a return of 15.44%. The average return for both categories though did beat the cap weighted return of the overall S&P 500 Index.

From The Blog of HORAN Capital Advisors

Jim Paulsen, Ph.D., Chief Investment Strategist at Wells Capital Management, recently wrote a research article on valuation of the S&P 500 Index. In his report, Median NYSE Price/Earnings Multiple at Post-War RECORD, Paulsen notes the median stock in the index trades at a record high valuation at approximately 20 times earnings. The report notes historically, when the market traded at high valuations, investors could find certain sectors not trading at high valuations. An example noted in the report,
"The 2000 stock market was characterized by a significant overvaluation among the fifth to 20th P/E percentiles while valuations in most of the rest of the market were either average or below average. Today, the entire stock market (low P/E stocks to high P/E stocks) appears highly valued relative to history. Similarly, Chart 8 [in the report] illustrates that today’s valuation profile is also much more broadly extended than it was at the top of the 1970’s Nifty Fifty era."
According to Paulsen, an implication of this high median valuation could be cap weighted indexing for the U.S. market will generate better returns than an equal weighted approach. Additionally, international market valuations suggest opportunities may exist in those markets vis-à-vis the U.S. Several of his comments in the report around this topic,
  • "First, the valuations of U.S. stocks are much higher than widely perceived or as suggested by the valuation of the popular S&P 500 Index. Moreover, today’s valuation extreme is not limited only to a subset of stock market sectors but rather is very widespread whereby nearly all P/E multiple percentiles are at or close to post-war records."
  • "Finally, the current valuation extreme is not the result of poor performance from a single valuation metric. U.S. stocks are broadly and richly priced compared to earnings, cash flows, and book values. Second, because valuation dispersion is relatively low today, there are not many areas to hide from overvaluation. In 1973 or 2000, investors could reduce extraordinary valuation risk by simply diversifying away from the Nifty Fifty or new era tech stocks. Today, because values are both high and tight, lessening valuation risk may not be possible except by allocating away from U.S. stocks."
  • "Today, even though a larger portion of the overall stock market is aggressively priced, it has not garnered nearly as much attention. A concentrated valuation extreme tends to loudly announce itself whereas a broad-based valuation extreme seems more stealth and, therefore, perhaps more dangerous."

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