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Dividend Yield - An investment factor?

Reading: White paper from Tweedy, Browne (verbosely) titled "The High Dividend Yield Return Advantage: An Examination of Empirical Data Associating Investment in High Dividend Yield Securities with Attractive Returns Over Long Measurement Periods."

tl;dr; summary: High dividend yield stocks as a whole outperform low dividend yield stocks.

However, unless you can buy high dividend yield stocks with transaction costs less than the outperform returns, this whole analysis is moot for the individual investor. Focusing on a smaller basket of stocks like the "Dogs of the Dow" is better. The "Dogs of the Dow" strategy is well known, and as a result, it did not surprise me that its 10 year return was lower than the Dow itself.

My portfolio has some stocks that pay dividends, mainly as a mechanism to generate income for future stock purchases. In other words, this portion of my portfolio is used for capital reallocation. The fact that, as the report suggests, high dividend stocks are less volatile in terms of the standard deviation of returns is not that important - my time horizon is long term and I still believe in value investing, so I still need to believe a dividend-paying stock is sufficiently undervalued.

Lists like S&P 500 Dividend Aristocrats and International Dividend Achievers™ Index are good starting points to peruse. My strategy is to pre-populate limit buy orders of selected companies with pre-computed valuations (that have a margin of safety). This runs the risk of buying a company that has truly deteriorated fundamentals, but with Mr Market antics like the occasional dips and flash crash, coupled with regular reevaluations to keep the buy order list up-to-date, I have managed to snag high quality dividend paying stocks like ADP, MMM, JNJ, PG and XOM at very good price points. Most recently, if you follow my covestor account, you might even noticed me purchasing GSK - the salient points for GSK is a high barrier of entry due to regulatory laws and it is one of the few companies capable of being in this field due to its economics of scale. The downsides of a volatile restructuring by its CEO and recent legal woes, but even so, as everything in life, these will pass.

Reader Comments (7)

Interesting that strategies like the "dogs of the dow" under-perform the market, but it makes sense too. In fact, it suggests a new strategy: Buy everything that does not fit any of the strategies that are well-known. After all, if the pursuit of stocks that meet the requirements of various "systems" causes over-buying and so under-performance, the remaining parts of the market mathematically must outperform the market as a whole, since iit includes these under-performers.

April 8, 2011 | Unregistered CommenterSteve Gillman

The problem is the ability to buy these "loser" stocks :) cheaply enough as a basket of stocks. Perhaps it is time to create a new index fund that inversely weighs each stock by its weights and its overperformance in other index funds.

I just finished reading The Big Secret for the Small Investor: A New Route to Long-Term Investment Success which talks about Joel Greenblatt's concept of value-weighted funds. See this Morningstar article of an interview with Greenblatt about this class of mutual funds. In any case, it's a systematic method of buying stocks weighted by how cheap they seem. Also see this Seekingalpha writeup on this so-called value-weighted managed funds.

These funds are actively managed, so aware of the cost of fund fees.

April 17, 2011 | Unregistered Commenteryj

i find that one has to know the trend as well. i am a dividend investor but i use the 200 day ma to tell me what the current 4 year trend is.

there is no pt holding div stocks at exp prices only to see it plumnge 30%. >>

May 4, 2011 | Unregistered Commenterkyith

This was a useful post and I think it is rather easy to see from the other comments as well that this post is well written and useful. Keep up the good work.

July 6, 2011 | Unregistered CommenterStock Market Lesson

Nice blog!!!! The "Dogs of the Dow" strategy is well known, and as a result, it did not surprise me that its 10 year return was lower than the Dow itself.

August 16, 2011 | Unregistered CommenterSharelord

I don't think that people should not invest in stock markets. Many investors are getting profit by investing in the stock market. My cousin has got lots of profit but the investor should be careful and should have full knowledge of stock market.

invest in stocks

August 27, 2011 | Unregistered Commenterinvest in stocks

interesting to see that dividend yield has become a new form of determining investment factors

September 1, 2011 | Unregistered CommenterVC Independent

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