“Sell in May and go away.” More than a stockbroker myth, there is evidence that the trend against stocks in the summer is fairly predictable.
Looking at data going back to 1962, the Stock Trader’s Almanac found that gains from that fateful spring month through October are quite weak, with the Dow putting on just 0.3 percent.
From November to the following April, the figure was 7.5 percent for the index. Some years it doesn’t happen, but there’s a likely reason the market breaks down in late spring: Traders have come to expect it to, so they pull the trigger.
But what happens to the money? If dividend stocks are any indicator, not all the cash heads to the door in a rush.
New research from Al Frank Investment Management, cited by The Wall Street Journal, found that high dividend-payers offered a solid return — just under 4 percent, on average — during the summer. Non-dividend payers lost money.
The Al Frank study goes back to 1928. Unsurprisingly, non-payers did much better from November to April. But leaving the market in May and going to cash might not turn out to be the best approach, and particularly not if you happen to sell high-dividend stocks to get out.
Using the study’s numbers, the Journal suggested investors seek out yields above 3.22 percent to capture the upper segment of S&P 500 stocks that did the best in summer.
An alternative might be the SPDR S&P Dividend ETF (SDY). It tracks the S&P High-Yield Dividend Aristocrats Index, containing the 50 highest dividend payers that have increased dividends each year for 25 years.
The index dividend yield is 3.46 percent, well over the Journal’s recommended minimum, while the fund itself has a relatively low expense ratio of 0.35 percent. The fund’s yield was recently at 3.28 percent.
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