A commonly argued reason for recent share weakness is the lack of "value" in the market. Analysts can argue all day about valuation - its a much less precise concept than many investors think. Individuals may not have the time, skills or inclination to build a monster spreadsheet that values the companies that interest them, but there are short cuts.
Rather than value a company itself, investors may focus on what a share is worth to them - and dividend yields are one way to assess an investment from the holder's point of view.
The almost doubling in price by Telstra and the big four banks since 2011 has them on the sell list for many. Yet the key reason for buying them - dividend yield - still stacks up. This table shows an estimate of yields at current prices:
The fully franked yields in the right column of the table show returns that may be considered attractive in a 2.5% interest rate environment. Investors focusing on dividend yields are particularly aware of two key risks:
1) While returns may be attractive, there is also capital risk to consider. Share prices fluctuate, and investors with short time frames or a need for funds may be forced to sell when prices are unattractive. Of course, as many investors have found over the last few years, capital risk can be positive or negative - share prices can go up as well as down.
2) Future dividend yields are estimated. Dividends change over time, broadly reflecting the underlying business. The above estimates assume a fairly conservative 3 - 3.5% lift for bank dividends and a flat Telstra dividend. However, those expecting a housing market apocalypse or the unwinding of the NBN (or similar events) would not rely on these estimates.
Despite these yields, share prices can come under pressure as the stocks go "ex-dividend". How low would they have to go before the yields become compelling?The table shows the yields (using the estimates above) if shares prices fall by 10% and 20%. Its easy to argue that these yields could limit any share price falls, except in extreme circumstances - good news for current share holders.
Even without franking, there is a yield argument:This is important to international investors, who may not qualify for the tax credits that franking represents. However, Joe Sixpack and Mrs Watanabe may still find these worthwhile given they face American and Japanese interest rates close to zero.
These tables are also relevant to the overall outlook of the market. Telstra and the financials make up around half of the Australian share market's value. It's difficult to imagine a melt down in a market with this sort of yield support.