Generally most people would agree that every lowering yield drives yield stocks. What happen if when the music stops ? In the year 2008 Global Financial Crisis, CMT my most often used example, price crashes from the high of $2.18 in Year 2007 to $0.875 in early part of Year 2009. That Year 2008, CMT distributed $0.13. In Year 2009, CMT yield hits 11.5% !
How hard is the crash ? 60% drops ! If we include $0.13 dividends, that’s about 54% drops. That’s why is called Global Financial Crisis.The scale could be a single lifetime event. As mentioned earlier, if one could not walk out of this scenario, they probably have waited outside the market for 10 years already. That’s another GFC to oneself and it won’t be a single lifetime event.
At today CMT price of $2.60 , the optimistic yield is 4.7%. This is way surpass Year 2007 before GFC prices of yield 6.6%. If we are to judge CMT as too expensive because of Year 2007 low valuation, then we could get our logic totally wrong.