AI
Friday, April 10, 2009 3:36:04 PM
Hi Clive, Re: Cash "Yield" vs Stock Dividends.............
I created this graphic recently showing how the yield of a very low risk (13 week Treasury Note) "competes" with Stock Dividends over time. I don't think I shared this with the group, however.
If we think of a low risk money market yield as competition for stock dividends, then we have to weigh the relative risk of being "risk free" with the risk of being invested in the stock market. Over time this changes around quite a bit. This graphic shows the Value Line dividend yield being subtracted from the 13 Week Treasury Coupon rate over time.
(positive values = higher risk stock markets; negative values = lower risk stock markets)
When the low risk treasury rate is paying 5% and the Value Line average dividend is paying 1.6% as we had in 2007, we see that the relative risk of being in the Stock Market is quite high. Moving forward in time to recent weeks, the treasury coupon rate is now paying less than 0.25% but the average Value Line dividend is between 3% and 4%. Under such circumstances, the "low risk" treasury rate cannot effectively compete with the average dividend yield of common stocks. At such times, the "low risk" investment becomes equities, not treasuries.
If we relate this to what AIM does for us automatically, we see that AIM tends to be very heavily invested when the average Stock Dividend Yield is quite high (and money market rates are low). AIM also, very kindly, shifts our money from stocks toward the short term cash holdings when cash is yielding its best cyclical levels. What is truly interesting is that AIM doesn't know or care what the current Money Market rate is and yet manages to be doing the right thing at the right time.
AIM's like the old joke about the Thermos Bottle.
"It keeps hot things hot and cold things cold.
But how do it know???"
Best regards,
Tom
I created this graphic recently showing how the yield of a very low risk (13 week Treasury Note) "competes" with Stock Dividends over time. I don't think I shared this with the group, however.
If we think of a low risk money market yield as competition for stock dividends, then we have to weigh the relative risk of being "risk free" with the risk of being invested in the stock market. Over time this changes around quite a bit. This graphic shows the Value Line dividend yield being subtracted from the 13 Week Treasury Coupon rate over time.
(positive values = higher risk stock markets; negative values = lower risk stock markets)
When the low risk treasury rate is paying 5% and the Value Line average dividend is paying 1.6% as we had in 2007, we see that the relative risk of being in the Stock Market is quite high. Moving forward in time to recent weeks, the treasury coupon rate is now paying less than 0.25% but the average Value Line dividend is between 3% and 4%. Under such circumstances, the "low risk" treasury rate cannot effectively compete with the average dividend yield of common stocks. At such times, the "low risk" investment becomes equities, not treasuries.
If we relate this to what AIM does for us automatically, we see that AIM tends to be very heavily invested when the average Stock Dividend Yield is quite high (and money market rates are low). AIM also, very kindly, shifts our money from stocks toward the short term cash holdings when cash is yielding its best cyclical levels. What is truly interesting is that AIM doesn't know or care what the current Money Market rate is and yet manages to be doing the right thing at the right time.
AIM's like the old joke about the Thermos Bottle.
"It keeps hot things hot and cold things cold.
But how do it know???"
Best regards,
Tom
Port Washington, WI 53074
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