Dividend Yield

Hope you've been having a good week. I wanted to briefly discuss the Dividend Yield factor in our US model, as our Factor Profile is indicating that it's currently “Extremely Oversold.”

Historically, we've seen Dividend Yield rally when investors have limited alternatives for yield - particularly in a lower rate environment. In a rising yield environment, dividend payments might not be as attractive relative to bonds, and thus investors will likely rotate out of them. Because of this, we tend to see Dividend Yield as having a negatively correlated relationship with the Growth factor. You can see this play out in the following chart:

As you can see, since 2007, these two factors have had a strong negative correlation. In particular, since August 2017, we've seen Dividend Yield and Growth moving down in their correlation significantly. This makes sense as we've seen the Dividend Yield factor rally in periods of slower growth, and sell off in periods of higher growth.

Today, Growth is the more attractive factor - but as we've seen in the past, factors that are extremely oversold tend to revert to their longer-term trend. Dividend Yield is currently -2.17 standard deviations below its historical trend on a normalized basis, so we might expect to see an inflection point in the near future (although we don't currently see the curve flattening).

We'll keep an eye on Dividend Yield and let you know when we see a signal that suggests that it will see a reversion, and read through what the implications might be to the Growth factor.

As always, if you'd like to see the impact of any of these factors on your portfolio's performance and risk profile, or would like to better understand how we measure the relationships between factors, please don't hesitate to reach out.

Regards,
Omer