Fallible Analysts, Reliable Dividends
Unfortunately investment analysts are just as prone to the standard behavioural biases as the rest of us and are inevitably more affected by incentives designed to promote short-term outperformance. In particular when market conditions become turbulent most earnings forecasts become slightly less useful than an unsinkable submarine.
Dividends, on the other hand, are less volatile than earnings. Even better, analysts' dividend forecasts are much more reliable than their earnings forecasts. So if dividends are a sign of healthy companies then using analyst dividend forecasts as a forward signalling mechanism may offer a way of obtaining market beating returns at little excess risk. Although, as it turns out, whether this works or not depends on whether your country’s legal system was created by a bunch of Vikings masquerading as French nobles rather than the descendents of Julius Caesar.
Unfortunately investment analysts are just as prone to the standard behavioural biases as the rest of us and are inevitably more affected by incentives designed to promote short-term outperformance. In particular when market conditions become turbulent most earnings forecasts become slightly less useful than an unsinkable submarine.
Dividends, on the other hand, are less volatile than earnings. Even better, analysts' dividend forecasts are much more reliable than their earnings forecasts. So if dividends are a sign of healthy companies then using analyst dividend forecasts as a forward signalling mechanism may offer a way of obtaining market beating returns at little excess risk. Although, as it turns out, whether this works or not depends on whether your country’s legal system was created by a bunch of Vikings masquerading as French nobles rather than the descendents of Julius Caesar.