The Globe and Mail reports in its Friday, Jan. 31, edition that over the past decade, relative yields have been a good indicator of the Big Five's future price returns.
The Globe's Scott Barlow writes that before the financial crisis, the average dividend yield for the Big Five banks was well below the five-year government of Canada bond yield. In general, investors were content to accept the smaller income payments in the (eventually correct) belief that stock-price appreciation would at least compensate for the difference.
Currently, bank dividend yields have remained well above bond yields -- the exact opposite of the pre-2007 trend. Mr. Barlow says the average bank yield minus the five-year bond yield has been highly correlated with bank stock returns in the following two years.
The average bank dividend yield is currently 2.8 per cent above five-year bond yields. If previous patterns persist, this implies a cumulative average bank-stock return of about 20 per
cent. Mr. Barlow notes that dividend yields have proved an important predictor of future stock returns and, in a yield-starved market environment, this should remain the case.
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