Dividend yield (Dividend Yield in English) is one of the most important fundamental ratios of financial analysis that exists.
It measures the ratio between the dividend per share that a company has distributed during a determined time – ideally a year – and its price.
The dividend yield is a ratio that is used in almost all the fundamental analysis panels that we find in the network.
We can see it next to the PE, ROE, Price / Cash Flow, and so on.
The essence of the ratio is very simple and is the fundamental reason why there are so many investors in the world who decide to look for strategies based on companies that give better dividends than average: the typical strategies of “aristocrats of the dividend”, and of which I have spoken occasionally.
The logic is impeccable.
The dividend yield as an indicator of the good performance of a company
If a company pays high dividends it is because it is, not only earning money, but also that it can earn it in a solid and constant way over time because it is not so worried about growing.
That is, with dividend yield we could differentiate between companies that have good dividends over time, companies that distribute scarce dividends and companies that do not distribute dividends.
The thesis of dividend strategies is that by paying generous dividends these companies are fully consolidated and with well established businesses; and it is true.
The companies that distribute the best dividends are those which businesses are already, to put it in some way, more mature, and in a way it is more difficult for them to go bankrupt.
The typical cases are those of companies which businesses are completely assimilated in the societies and those that operate under the regulatory umbrella of the State in the form of “semi-oligopoly”, this latter case being very typical of the most Latin societies, for example Spain, Italy or South America .
For example, companies with high dividends with a large track record and “mature” are those that can be found in the Dow Jones, such as IBM, Exxon or Coca Cola.
Many of these companies obviously did not pay many dividends in their growth stages, when their products were still in the phase of penetration in world markets.
Nowadays they are “stable” companies (if that we can use the term on the stock market) and with more than consolidated businesses in the world, so they distribute attractive dividends as much as they can.
Another group of companies that distribute dividends are those that have resulted from old privatizations of state companies and highly regulated sectors, as is the case of many Spanish giants such as Endesa, Repsol, Ibredrola, Telefónica, and etcetera.
Dividends are high when a company falls
The day I write this article we have some companies in the IBEX 35 giving spectacular dividends like Mediaset and DIA, with 9.24% and 7.49% respectively.
With those dividends they would be very attractive companies to invest, or not?
In theory yes, because in 10 or 15 years, and at the current price, those companies have the potential to return the investment only in dividend payments.
However, these companies have the highest dividends of the IBEX 35 today because they have fallen a lot of price, which shows that they are companies that are going through difficulties in the stock market, for whatever reason.
Logic tells us that if they are making money and overpay the market should be undervalued and we would have a good opportunity to invest here, and certainly it is a bet that could go well and earn a lot of money but could also go wrong if any of these Companies just going bankrupt.
Example of dividend yield in a company with problems
For example, the case of DIA (the previous chart) is about a company that does not have great advantages by state regulation, having to compete in a very tough market like that of the supermarkets, so it is not ruled out that in the future it could break, especially if a major recession happens in the middle of this fall.
This last concept is important because normally the “aristocratic actions of the dividend” come to pay large dividends in the important stock market crashes when there are crises or recessions, as was the case in 2008 and 2009.
It is the moments of crisis and general declines that offer us the best opportunities to enter to buy with “value” those values that pay high dividends, since it is in those moments when their price is relatively “undervalued”.
In 98% of the cases the stock market ends up recovering and those values that we buy with 7 or 10% of profitability end up rising and not only we gain in capitalization but in assets that pay us a good profitability.
That is why it is a bit more complicated to take these bargains when the stock market is not particularly in crisis, because they may be cases that are “telling us” that the company is going bad despite being in a quiet market, as in the case of DIA or Mediaset in the summer of 2018. Only time will tell if these values will have given value or not.
Does dividend yield serve to invest or trade?
Obviously, the dividend yield is an indicator of fundamental character and of little value in the world of trading.
Following this type of data only makes sense in the study and execution of medium and, above all, long-term strategies.
In this sense I remind you that the mere fact of being interested in making a dividend strategy already indicates that you are on the right track, because this type of strategy is usually one the safest in the world of investment.
Safe because it is a strategy in which we will always go to do some “surebet”, that is, buying shares of global companies with mature businesses, constant benefits and that it seems difficult to go bankrupt.
That will make you part of that group of successful investors who will eventually make money.
Not much or very fast, but in a way that is consistent and solid enough so that our savings grow substantially.
Therefore, if you are a short-term trader it does not make much sense that you follow the dividend yield of one share.
If you are an investor, yes: that is something that you should take into account and that can give you some clues about the type of action in which you are investing.