Although markets have already rallied strongly in 2012, the move is still early if current price ratio trends behave similarly to recent history. The chart shows the price ratio of the SPDR S&P Dividend Index ETF (SDY) relative to the S&P 500 (SPY). A rising price ratio means dividend-oriented stocks are outperforming (risk-off), while a downtrend suggests the opposite (risk-on). Much like a pendulum that swings from fear to hope, investor sentiment goes through cycles in terms of what type of returns are preferred at any moment in time.

Notice the far right of the chart. When we last put the post up on January 10th, the rally was just getting started, and dividend-oriented sectors such as Utilities (XLU), Healthcare (XLV), and Consumer Staples (XLP) started underperforming in a meaninful way. The persistance in the downtrend could result in further weakness in dividend stocks and strength in more cyclical/capital appreciation sectors. The estimated underperformance in SDY relative to SPY should the ratio return back to its support range is a bit under 5% on a spread trade basis. Either way, the point is that a downtrend in SDY/SPY is the bull investor’s friend, and there is likely much more room to fall in terms of the movement away from income and into growth. I discussed this idea at length in an interview I did on Bloomberg Radio last week (here)

The contrarian trade is no longer about markets going up or down, but about the length of time the trend persists.



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.

Category: Dividends, Fixed Income/Interest Rates

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “Dividend Tax Increase Effect on Dividends/Capital Appreciation”

  1. wcvarones says:

    What does this have to do with a dividend tax increase?

    Why is there a dividend tax increase label on the chart in February 2012?

    What is this guy talking about?

  2. Mike Radigan says:

    BR, there are many sites such BigCharts where you can plot SDY and SPY but I cannot find one where you can plot SDY / SPY. Help!

  3. rjb says:

    >>… I cannot find one where you can plot SDY / SPY. Help!<<


  4. Mike Radigan says:

    rjb, I found that site, and like BigCharts it lets you plot multiple symbols. But I still do not see where you can plot one symbol divided by another.

  5. DrungoHazewood says:

    Gayed’s been dead on for a while.

  6. RuffRednSore says:

    This is how you get it on stockcharts.com, put it in the format: SDY:SPY. The colon symbol acts as a divisor. Not sure if it allows you to do that if you’re not a subscriber though.

  7. Mike Radigan says:

    Works like a charm and I’m not a subscriber. Thanks.

  8. Mike Radigan says:

    I should add, as a non-subscriber I could not save the settings. No biggie!

  9. Smokefoot says:

    I’m confused – the author says that there is much more room to fall (to continue the bull move), but the chart seems to show that we are near the end of the move.

  10. siltnamiai says:

    Yes the trends looks the same as in 2008. I think it will siltnamiai go down the same way. Crisis is still there and it will hit again.

  11. mad97123 says:

    Looks like your basic “sell in May go away” pattern in play. Perhaps the smart money will start front-running it.

  12. pensionpartners says:

    To be clear, the dividend tax circle relates to when news crossed of the proposed dividend tax hike by the Obama administration. Point is the further breakdown in the ratio was in part caused by that news announcement.

  13. La Marque says:

    As a dividend stock buyer, of course, it’s risk-on for cap gains, risk-off for dividend stocks. Dividend stocks are overpriced for yield. No buyer such as pension funds and insurance companies along with the retail investor wants a capital loss in the next correction.

  14. blackjaquekerouac says:

    “the trend is your friend until its not.” all about risk…nothing more. nothing less either of course.

  15. Tyler K says:

    “I’m confused – the author says that there is much more room to fall (to continue the bull move), but the chart seems to show that we are near the end of the move.”

    The confusion stems from the text above being a “copy and paste” job from the Feb 22nd follow up post to the original

    - http://www.ritholtz.com/blog/2012/01/cap-gains-vs-dividends/ (original)
    - http://www.ritholtz.com/blog/2012/02/more-room-to-rally/ (follow up)
    - the article you are reading now (the third installment … or 2nd follow up if you prefer)

  16. pensionpartners says:

    Yes – this is a third update to the chart Barry put up when I first sent it to him in January. If you actually read the text, it is different. I do apologize for not making the annotation more clear. The bubble is around the time the Obama Administration announced higher dividend taxes in its 2012 budget proposal. Higher dividend taxes to come I am arguing hurt dividend stocks even more, which in turn may actually casue more risk-taking in cyclical/non-dividend paying stocks.

    Michael A. Gayed, CFA
    Chief Investment Strategist
    Pension Partners, LLC

  17. Tyler K says:

    “If you actually read the text, it is different.”

    Michael, if you refer to the text being different from the original post from January, then I agree. But if you refer to the text in the Mar 30 post (3rd in the series, and the 2nd update) being any different then that of the Feb22nd post (2nd in the series, and the first update), then I can quite confidently tell you that, after switching into FOMC statement analysis mode, the ONLY differing sentences are:

    Feb 22 – “I discussed this idea at length in an interview I did on Bloomberg Radio last week, which can be heard …

    Mar 30 — “I discussed this idea at length in an interview I did on Bloomberg Radio last week (here)”

    The charts are, of course, differing, but what you have just mentioned above in your reply is in no manner addressed in the body of text for this post….again, copy & paste has claimed another victim, and, consequently, the confusion expressed by the earlier poster.