• High Dividend Yield Period: Periods in which the starting trailing 12-month dividend yield was above the median trailing 12-month dividend yield for the index. The median trailing 12-month dividend yield was 2.25%.
• Low Dividend Yield Period: Periods in which the starting trailing 12-month dividend yield was below the median trailing 12-month dividend yield for the index.
Figure 2: Performance Summary of the S&P 500 Energy Index
• Dispersion from High to Low: We believe that the bars in figure 2 make the statement that valuation is of paramount importance for the S&P 500 Energy Index. On a median basis, returns of the High Dividend Yield Period eclipsed those of the Low Dividend Yield Period over each of the periods displayed above. The largest dispersion occurred over the forward 36-month period, where the high yield period outperformed the low yield period by almost 30%.
While we think the dividend yield analysis is a strong and important valuation indicator for the energy sector, it is important to remember that there are also many factors that can impact returns in the short run, especially in the politically driven oil market.
We also think it is important to focus on fundamentals like dividend yields and revisit those fundamentals periodically. Currently, based on the above historical analysis, the energy sector offers a potentially attractive entry point, but it would be prudent to monitor dividend trends in real time.
1Source: Bloomberg, 6/30/14‒12/31/14.
2Source: Bloomberg, 1/31/90‒12/31/14, based on month-end dividend yields.
3Note: There are 294 unique periods in which a six-month forward return can be calculated, 288 unique periods in which a 12-month return can be calculated and 264 unique periods in which a 36-month forward return can be calculated.
Important Risks Related to this Article
Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.