The Dividend Fallacy

"I prefer to be true to myself, even at the hazard of incurring the ridicule of others, rather than to be false, and to incur my own abhorrence." - Frederick Douglass
Emerging market bonds (LEMB) have come bounding back with incredible momentum. They are only performing second to high yield bonds (JNK) year-to-date, as investors hunt for yield and rates remain low.

Who can blame them? Since 2008, the amount of bonds yielding more than 4% shrank by $25 trillion. Global central banks have been buying assets for a decade, pressing bond yields to historical lows. Prices are so high investors stand little to gain for the risk of losses and inevitably investors who feel they need the additional yield have had to search elsewhere: high yield bonds and emerging market bonds.

Another reason for investors' preference towards dividends comes from the dislike of profits, as these are a matter of accounting opinion. Dividends are real and paid in cash and often favored by yield hunting investors. Dividends also make up a large percentage of total return, but in the US, multiple expansion is also important.

Despite the significant compounding effect of dividends over the long term, high forecast dividend yields rarely materialize. For example, where companies have forecasted an average yield of 15-20%, less than 6% actually materializes in reality.

In fact, screening companies based on high yield can lead to bigger drawdowns and underperformance... Read more