Relative Dividend Yield
Updated on March 20, 2023
Relative Dividend Yield is a strategy used by investors to determine if a stock is underpriced or expensive by comparing its yield to the dividend yield of the broader market.The followers of this approach do not use other methods like P/E ratio, past performance or earnings for stock evaluation, but rely on long term dividend yield of the stock. The identified stocks might be from slow but stable businesses with good dividend record. The Relative Dividend Yield approach helps investors in picking stocks in bull as well as bear markets.
How is Relative Dividend Yield used?
The Relative Dividend Yield is also an indicator of the market sentiment. A high Relative Dividend Yield might be indicative of poor sentiment, while a low Relative Dividend Yield will signal investor enthusiasm. The relative dividend yield approach makes investors buy when other investors are selling and sell when other investors are buying.
What are the special features of Relative Dividend Yield strategy?
Some key features of Relative Dividend Yield approach are :
a) Above average yield – Relative Dividend Yield stocks have higher than average yields. The approach focusses on identifying undervalued stocks with high yield which is likely to cover for slow capital growth
b) Low risk – the Relative Dividend Yield strategy aims at stocks with lower risk than the market, which have underperformed the market for some time and are less likely to fall further.
c) Low turnover: Low turnover leads to lower transaction costs and lower realized capital gains in any given year, which also means lower taxes.