This market-timing strategy uses the dividend payout ratio as an indicator to predict future stock market return. In this strategy, stocks are supposed to be sold when the indicator falls below the predefinded threshold value, and vice versa. It also has “delay day” and “waiting day” settings.

    Lamont (1998) suggests that the dividend payout ratio, defined as the ratio of dividends per share to earnings per share, has predictive power for future stock market returns.  In particular, he argues that the dividend payout ratio should be positively correlated with future returns, since high dividends typically forecast high returns whereas high earnings typically forecast low returns.

    In this Strategy, for the dividend payout ratio, Rising above a certain threshold is considered to be a switch signal from holding cash to investing in S&P 500 Index, and vice versa. If the same switch signal persists for “delay days”, we switch the trading position. And in the succeeding “waiting days” we keep the position ignoring the new switch signals. The signals are examined every trading day.

    Threshold can set to be certain fix values or SMA (Simple moving average) of certain days. The BuySecurity can only be set as ^GSPC or VFINX. And the Portfolio StartDate should not be set to the date earlier than 01/01/1990 due to lack of data.

Parameters used in the created portfolio:

Indicator: Dividend payout ratio

TresholdValue: 0.3, 0.5, SMA 30days (default), SMA 120days

WaitingDay：1 day, 5 days (default)

DelayDay: 1 day, 5 days (default)

BuySecurity: ^GSPC (default)

Similar Strategies in ValiFi:

• Market Timing Rule with Short Term Interest Rate: using the short-term interest rates as an indicator 
• Market Timing Rule with Maturity Spread: using the spread of long-term and short-term interest rates as an indicator 
• SMA Timing Method proposed by Faber: using the SMA of the target asset as an indicator
• High Yield Bond Timing Strategy: using  trend  triggers (percentages from recent high or recent low) of the asset price for buy and sell decisions
• The 125 05 Timing Model of High Yield Bond Strategy by Gerald Appel: using  predifined trend  triggers (percentages from recent high or recent low) of the asset price for buy and sell decisions
• Market Timing Rule with Long Term Interest Rate: using long-term interest rate as an indicator
• Market Timing Rule with Earning to Price Ratio: using the E/P ratio as an indicator
• Market Timing Rule with Dividend Yield: using the dividend yield as an indicator
• Market Timing Rule with Expected Inflation: using the expected inflation as an indicator
• Market Timing rule with Implied Volatility Index : using the implied volatility index  as an indicator  
• Market Timing Rule with Bond-Equity Yield Ratio : using the bond-equity yield ratio as an indicator 
• Market Timing Rule with Credit Spread :  using the credit spread as an indicator
• Market Timing Rule with Put/Call Ratio:  using the put/call ratio as an indicator
• Learning Market Timing Rule: following the most profitable rule of the above simple market rules in each period 
• Voting Market Timing Rule : Switching the position if a certain percentage of the above simple market timing rules intends to do so.

See Also

Relative Working Papers: