Preference for Capital Gains over Dividends Reveal Investor Psychology


The chart comes to us from Michael Gayed of Pension Partners, who points out that investors preferences for dividend versus the broader index is revealing of investor psychology:

“We all know that markets continuously go through ever-changing cycles of fear and greed, defense and offense right? Much like a pendulum, investor sentiment swings and goes through cycles as well. The above chart shows the price ratio relationship of the S&P 500 Dividend ETF (SDY) relative to the S&P 500 itself. A rising price ratio means that dividend stocks (SDY) are outperforming capital appreciation stocks (SPY). Notice outperformance means being either up more, or down less.

What do you guys notice here, particularly as it relates to the 0.43ish level over the past three years? Notice early 2009 (bull market following March low), late 2010 (start of QE2 equity rally), and where we are now. Is the pendulum finally swinging away from dividends and back to favoring capital appreciation? Does this suggest the bull market may indeed be real this time despite continued concerns over Europe?

Remember – price is truth. What you and I think does not matter. The only thing that matter is what the person we’re selling to thinks After all, that’s what sets price.”


Michael A. Gayed, CFA is Chief Investment Strategist at Pension Partners, where he structures portfolios. Prior to this role, Michael served as a Portfolio Manager for a large international investment group, trading long/short investment ideas in an effort to capture excess returns. In 2007, he launched his own long/short hedge fund, using various trading strategies focused on taking advantage of stock market anomalies. Michael earned his B.S. from New York University, and is a CFA Charterholder.

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