An alternative Alternative

Source: Bloomberg

One of the reasons is that looking at absolute dividend yield doesn’t address risk. High dividend yields can reflect problems with a business. For example Tobacco stocks tend to have high yields, because investors are skeptical of their ability to maintain them in the face of structural declines in their core markets.

This then leads to the importance of fully understanding your investments to identify sustainable dividend returns. An example is Swiss Re AG (SREN.SW) - a leading wholesale provider of reinsurance, insurance and other forms of risk transfer. Swiss Re have a current dividend yield of around 8.4% and an extremely strong capital position, with twice the amount of capital required by the regulator. While no analyst is foolish enough to say a company will never cut its dividend, our research suggests distributions to shareholders are far more secure than the share price indicates.

It’s also worth noting that as previously discussed, the traditional investment portfolio construction of 60% equities and 40% bonds (fixed income) is not delivering as it historically has.

A recent example below shows all the S&P 500 corrections of 8% or more over the last 10 years. From peak to trough in the S&P, bond yields have typically fallen. However, the recent correction last month was a rare exception – the market went down but bonds didn’t go up. Bonds didn’t play their role in the 60/40 as an alternative to balance out equity loss.