Dividend-Yield Strategies: A New Breed of Dogs

Abstract

Dividend-yield strategies generate investor interest because they have historically offered better risk-adjusted performance. We test the performance the Dogs of the Dow (DoD) strategy, one of the most prevalent dividend-yield strategies, using Fortune’s Most Admired Companies (MAC) by comparing the performance of a top 10% dividend-yield MAC portfolio (MAC Dogs) to the returns on the Dow Jones Industrial Average (DOW), the standard DoD strategy, and two benchmarks (the overall MAC portfolio and the S&P 500 Index). We find that the MAC Dogs provide significantly higher raw returns than both the DOW and the standard DoD strategy. Moreover, the MAC Dogs provide significantly higher raw and risk-adjusted returns against our benchmarks. Our results remain robust when using either alternative dividend-yield cutoff points or alternative event windows surrounding the issue dates for Fortune. Finally, we show that the average monthly returns are higher for the MAC Dogs than for either benchmark regardless of positioning in an economic cycle. Our results contribute to the existing DoD literature by expanding the strategy beyond application to traditional indexes. Specifically, we use a unique and replicable grouping of stocks based on MAC and offer support for a link between financial and social performance.

TOPICS: Fundamental equity analysis, mutual funds/passive investing/indexing, performance measurement