This is the analysis of 3rd and final indicator which I track on a monthly basis in the State of Indian Markets. The previous two posts have analyzed P/E Ratio and P/BV Ratio of Nifty since 1999, i.e. a dataset of more than 16 years.
The data for this and all previous analysis has been sourced from NSE’s official website (link 1 and link 2). Since data prior to 1st January 1999 is not available on the website, the analysis starts from that day itself..
So here is the result of the analysis…
The table above shows that if one is investing in markets where Dividend Yield (DY) > 3.0, returns over the next 3, 5 and 7 year periods have been an eye-popping 55%, 40% and 27% respectively. But if you think that you are smart enough to time the markets and invest only when DY>3.0, then let me tell you that it is really very tough. Markets with DY>3.0 are extremely rare. And to give you an idea about the rarity, here is a fun fact…
The markets have been available at DY>3.0 on only about 28 days since 1999, i.e. in 4000+ trading days!! Now you know how tough it is. And though as everyday investors, it’s almost impossible to wait for such rare occasions, it shows the power of long term, patient investing for those who know when to wait and when to jump in the markets.
On the other side of this return spectrum is DY<1.0, where returns over a period of 3 years drops down to a mere 2.2%
For your information, currently Nifty is trading at Dividend Yield of 1.23%
Below are three graphs to provide details of the exact Returns against the exact dividend yields on a daily basis (though arranged with increasing PB numbers).
The left axis shows the P/B levels (BLUE Line) and the right axis shows the Returns (in %) in the relevant period (Light Red Bars)
All three graphs clearly show that there is an direct correlation between Dividend Yield and returns earned by the investor. Higher the Yield when you invest, higher the expected rate of return going forward.
This completes the analysis of 3 key indicators. A few readers have mailed me and requested to combine these 3 Analysis and make it available online at one location. In few days, I will do a Comprehensive Post covering all three indicators P/E Ratio, P/BV Ratio and Dividend Yields and a few other findings about these 3 indicators.
Hope you found this and previous two analysis useful…
Thank you for sharing
Nice series of articles Dev !!!
The boring SIP seems to be the best option 🙂
Nice one Dev!
Looking forward to the comprehensive one!
One point to consider for the comprehensive post would be – given/combining all three indicators, are there must be 'few' spots (but not rare though) where investing would be at-least help minimize the loss of capital (with better than average chance of return)?
Thanks Ravi 🙂
Thanks Shyam 🙂
And there seems to be nothing better than sticking with SIPs (in well diversified funds) for retail investors like us.
That's interesting thought Anand…will try to find out something on those lines too.
Lets see if there is something which can help us…
Can an index be contructed using PE, PB, Div Yield, applying some weightage to get optimum/best entry point ?
alas i saw this only on 15th mar 2015!! a bit too late i should say and in this period between may -14 and mar 15 the stocks have risen still further!
Nice analysis sir
How about individual stocks of nifty do they behave in same way? For example metal pack like tatasteel are at div yield of around 3 %
Can we invest?
It can be done. But before anyone can use it effectively, it will require a lot of back-testing with decades worth of data. Even then it might not give a guarantee of high returns. At most, it will always remain an indicator.
Tough to generalize the same trend for individual stocks. Here we are talking about index – which in itself is based on law of averages and hence removes the seasonalities of individual industries and reduces the impact of company related developments. It might be interesting, but not very useful to do such an analysis of individual stocks.
But having said that, it can still be done for companies which have regularly paid dividends for past many years and try to maintain dividend payout ratios and yields.
Markets almost always provide us with another chances. So lets pray for another market crash so that we can enter at lower levels 🙂