- The dividend yield points to low long-term returns on equities.
- There's a lot we can do to mitigate this problem, such as not being a buy-and-hold investor.
We should prepare ourselves for years of low returns – and one way to do this is to take market timing more seriously.
One way to see the problem is to recall that the dividend yield on the All-Share index has for years been a great predictor of longer-term returns. With the yield now well below its long-term average, at 2.8 per cent, it is pointing to tough times for equities. Post-1986 relationships predict total returns on the All-Share index after inflation of only 0.6 per cent a year for the next five years. That implies a capital loss in real terms: all the returns will come from yield.