Idea of the Month

The idea of the month

Are stocks with high dividends yield good investments?

A brief history of the idea

Early evidence in Black and Scholes (1974) suggest that "it is not possible to demonstrate, using the best available empirical methods, that the expected returns on high yield common stocks differ from the expected returns on low yield common stocks either before or after taxes. "

Yet there are strategies trying to beat the Dow known as the "Dog of the Dow". It is an investment strategy that attempts to beat the Dow Jones Industrial Average (DJIA) each year by allocating money to the 10 highest dividend-yielding among the 30 components of the DJIA.

In this article, we look at this strategy in the UK market. We are tempted to name this strategy "Bulldogs of the FTSE".

Backtesting

We select the top 10% of the FTSE250 stocks ranked by their 12-month dividends yield, total dividend per share divided by the end period stock price for the 12-month period. (Dividend 12 Month Yld - Net). We backtest this in the past 20 years assuming equal-weighted among the stocks and rebalance every six months. The rebalancing points are at the beginning of April and Oct.

The following graph presents the cumulated total return which has taken into consideration of dividend reinvestment. Overall, the strategy beat FTSE100 by more than 100% with a mean annual return of 14.32%.