- Buying high yielding and selling low yielding stocks is not an attractive strategy
- Combining Dividend Yield with Quality & Growth factors improves the performance
- Interestingly Dividend Growth adds relatively little value
According to MorningStar assets under management of smart beta products breached $1 trillion in 2017 and more than half of the assets were invested in just three factors: Value, Growth and Dividend Yield. Naturally there is a significant amount of empirical evidence that suggests Value stocks generate positive excess returns across time, but much less evidence for the latter two factors. We published a research note in 2017 – Resist the Siren Call of High Dividend Yields – where we highlighted that buying high yielding and selling low yielding stocks has been a highly unattractive strategy over the last century. High dividend yields typically indicate high risks and investors have not been compensated for taking these, especially on an after-tax basis. However, perhaps the risks can be mitigated by combining high dividend yields with other factors. In this short research note we will analyse various Dividend Yield factor combinations.
In this research report we focus on six factors namely Dividend Yield, Value, Momentum, Quality, Growth and Dividend Growth. The factors are created by constructing long-short beta-neutral portfolios of the top and bottom 10% of stocks of the US stock market. The factor combinations are based on the intersectional model, which selects the stocks in the intersection of the factors. Only stocks with a market capitalisation of larger than $1 billion are included. Portfolios are rebalanced monthly and each transaction occurs costs of 10 basis points.
DIVIDEND YIELD VERSUS DIVIDEND YIELD & VALUE
The chart below shows the performance of a long-short portfolio based on the Dividend Yield factor and an equal-weight combination of Dividend Yield and the Value factor, e.g. the long portfolio will contain stocks that are high yielding and cheap on price-to-earnings and book-value multiples. We can observe that both profiles are comparable, which is not unexpected given that Dividend Yield can also be considered a Value metric.