When the market is truly "hot", few of us can remain rational as we tend to be swept along the general atmosphere of optimism.
But the dividend yield of a share keeps us in close touch with the real world.
Anyone who closely watched the dividend yield of a share would have realised that the price level was totally unreal. A good dividend yield stock presently giving a dividend yield of 0.4% due to rising share price, it would be better to sell the share and invest the proceed in other assets or leave the money in fixed deposit.
In the established stock markets of the world, the dividend yield usually has a steady relationship with fixed deposit and its interest rate.
It is normal for dividend yield to fluctuate at around one-third to half of the long-term fixed deposit interest rate. This means that when fixed deposit interest is around 6% per annum, stock should sell at a price to provide a yield of 2% or 3%.
Take a look at the yield provided by local shares during bull markets, the dividend yield is usually so low as to be meaningless.
Furthermore, one should not forget that some fixed deposits and fixed deposits in National Savings Bank are tax free in Malaysia while dividend has a withholding tax applied at source.
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