Selection of underperforming shares
Posted: July 3rd, 2019, 1:28 pm
If you had a share selection strategy that over a three year period had selected holdings that had seriously underperformed the do nothing of cash, the market in general or an IT regarded as a market proxy, would that lead you to question the logic behind the strategy?
In current conditions, perhaps if not historically, selecting by dividend yield and discarding all those shares with below average yields seems to give a list of under performers. The basic reason being that the yield is high because the price isn't. You do fine if they turn around, but a continued decline or even a wipe out is an appreciable risk.
For an income strategy you don't want Companies that have a policy of retaining earnings and profits and paying no dividends or derisory ones. Companies that both pay and increase dividends you do want. The problem is that everyone else does as well, so the share price moves to a premium with the running dividend yield falling below average. Two better known examples being Diageo and Unilever.
In current conditions, perhaps if not historically, selecting by dividend yield and discarding all those shares with below average yields seems to give a list of under performers. The basic reason being that the yield is high because the price isn't. You do fine if they turn around, but a continued decline or even a wipe out is an appreciable risk.
For an income strategy you don't want Companies that have a policy of retaining earnings and profits and paying no dividends or derisory ones. Companies that both pay and increase dividends you do want. The problem is that everyone else does as well, so the share price moves to a premium with the running dividend yield falling below average. Two better known examples being Diageo and Unilever.