What works in Paris: Dividend yield

We have recently reviewed the behavior of the dividend yield on the Swiss market. Let's see today what it is like in France. For more information on this ratio and on the method used for the backtest, do not hesitate to take a look at the last article.

Global market

We find a situation very similar to that which we had in Zurich, with a 3rd quintile higher than the 4th and just behind the 5th.

The stocks that display the best dividend yields perform twice as well as the market over the period analyzed (7.44% vs. 3.64%). Conversely, those that are the least generous to their shareholders display downright negative performance (-0.1% per year). This result is consistent with what we saw for the PER. It is even better for the 5th quintile. It is therefore better to favor the yield over price-earnings ratio on the French global market.

It should also be noted that the result for all quintiles is lower than what we had in Switzerland, which is logical given that the overall performance was less good (3.64% per year in CHF for France vs. 8.47% per year in CHF for Switzerland).

As in Switzerland, high yields work well in France, in any case much better than the market as a whole. However, this 3rd quintile continues to raise questions, especially since we already had this phenomenon in Switzerland.

To get to the bottom of things, I had fun seeing what it was like in the USA with the S&P 1500, which covers 90% of American stocks.

S&P 1500 Example - Dividend Yield

The 3rd quintile comes out ahead of all the others this time and there is especially a big surprise compared to Switzerland and France: the 5th quintile (yes, it is indeed the one with the highest yields) is the worst! This echoes the Yield Trap phenomena that I listed in the last post.

Comparison with peers

Let's go back to Macronie and see what the performance within industries tells us. As a reminder, in Switzerland, the backtest had made the 3rd quintile rise above all the others, indicating that companies that pay moderate dividends compared to their direct competitors obtain the best performance on the stock market. This is in line with what we have just seen on the global American market (S&P 1500).

This time, Paris stands out in several ways. First, curiously enough, there is a steady progression across the five quintiles. The 5th quintile is therefore the best performer. It is even better than what we found on the market as a whole. The comparison with peers for yield in France is therefore more effective and more valid than on the overall market. It should also be noted that the Yield within industries performs better than the PER within industries, which confirms what we had already observed on the market as a whole. So we have something quite solid here.

Big and Mid-Caps

I had described the result for the PER among the French Big and Mid-Caps as a joyous mess. In Switzerland, the yield for these companies had given rather strange results. In France, we obtain results that are quite similar and just as bizarre.

The 2nd quintile is surprisingly in pole position. The 5th quintile is second, but barely better than all the big and mid-caps. It is difficult to draw anything from this approach. Dividend yield is not an interesting strategy on large and medium-sized companies in France.

Small, Micro and Nano-Caps

The surprises continue. While with large and medium-sized companies, the 2nd quintile stood out positively, for smaller companies, it shows a terrible performance, almost zero.

The backtest doesn't really give us a clear result, with quintiles playing a bit of leapfrog. The PER did, however, show a fairly clear trend, with a steady progression across the quintiles (except for the 5th which was slightly below the 4th).

The only real lesson we can learn from this is at the 5th quintile level. Small companies that pay good dividends beat all companies of similar size. That's something.

So, what strategy should we adopt?

We saw that when taking the entire market, the highest returns gave the best stock market performance. But the moderate returns, with the 3rd quintile, were just behind, as in Switzerland.

Within industries, when comparing performance with peers, we obtained an even better result for the 5th quintile, with a nice regular progression across all quintiles, which is a guarantee of the robustness of the system. We did not have such a clean situation in Switzerland (the 3rd quintile was the best performer).

On the other hand, for large and medium-sized companies, the backtest has not taught us anything conclusive. A strategy based on dividend yield is therefore difficult to apply there. For small companies, it is hardly better, except for a slight advantage for high yields, but with relatively little robustness in the results.

In the Swiss market, it was possible to make sense of certain disparate data by using dividend growth and associating it with the average yields of the 3rd quintile. What about in France? A priori, this approach should work less well there, given that, overall, the 5th quintile is doing a little better. And yet the result is far from obvious. It can even be said that the two approaches are very close, both from the point of view of profitability and risk:

As with Switzerland, I compared which approaches worked best for each strategy: highest increasing returns in the global market, with respect to increasing moderate returns within industries.

For dividend growth criteria used, refer to Swiss market analysis.

We deduce that:

• Moderate and growing dividends are more profitable than high yields alone
• Moderate and increasing dividends have the same profitability as high increasing yields
• Growing high yields are more profitable than high yields alone. Surprisingly, in France, continuing to increase an already very high dividend has no impact on performance, unlike in Switzerland. Perhaps this is because French stocks, less profitable overall than their Swiss counterparts, have room for improvement when the right factors are used to select them.
• Moderate and growing dividends have a similar risk to high growing yields. We didn't have that in Switzerland either. Perhaps it's also due to the same reasons.

Use the profits

It is possible to further optimize this result by ensuring that dividends are well covered by profits (growth in profits over the last 12 months compared to the previous 12 months > 3% and average annual growth in profits over the last 5 years > 0%). With this, we increase the average annual profitability to 12,22%! But be careful, this only works with moderate dividends (within industries).

Conclusion

In France or Switzerland, moderate dividends (within industries) properly covered by profit growth represent the best yield strategy. We had seen that this approach had a major drawback in Switzerland: the narrowness of the portfolio, due to the restrictive criteria used.

France is not really an exception to this rule, even if there are slightly more candidates: on average 12 stocks for moderately increasing dividends and eight stocks for moderately increasing dividends covered by the increase in profits. This is already better, but insufficient for use in real life (unless coupled with another approach).

So why not broaden the scope of possibilities by selecting stocks in the French and Swiss markets at the same time? This was the idea we came up with at the end of the Zurich Yield analysis. We will see what this gives in our next article.