Research and Insights Library

Dividend Investing: A Value Tilt in Disguise?

This is a recap of a research paper by Gregg S. Fisher which was published in the Journal of Financial Planning in Fall 2012.

In a period of meager fixed-income returns, dividend-paying stocks have become very popular with income-seeking investors, and the strong performance of these stocks has only heightened their appeal. Curious to know why these equities were outperforming, we conducted a study of some of the underlying factors. We found that it was value factors, not dividend yield, that enhanced the returns of most high-dividend yielding stocks. In fact, the dividend-yield factor detracted from performance over the period we studied.

Research Findings

To analyze the sources of stock returns over the 33-year period from August 1, 1979 to July 31, 2012, we divided the Russell 3000 Index into 10 deciles and honed in on two portfolios: the total-market portfolio, which served as a benchmark, and the high-dividend-yield portfolio—the 10% of stocks with maximum exposure to the dividend-yield factor.

The high-dividend-yield portfolio’s annualized return was 1.27 percentage points greater than that of the total-market portfolio (12.42% vs. 11.15%).  This difference was enough to compound wealth 48-fold over the 33 years, compared to 33-fold for the total-market portfolio. But when we decomposed the factors explaining the returns, we found, interestingly, that the dividend yield factor actually contributed negative 1.02% annualized to the excess return—in other words, it detracted from performance. Factors that contributed to the outperformance of these stocks included value (defined as the ratio of book value to price) and earnings yield (earnings per share divided by price per share). The latter is another factor associated with value stocks.

Why would the dividend-yield factor have a negative impact? This factor is defined as a stock’s dividend divided by its price. Unless and until a company changes the size (in dollars) of its dividend, its dividend yield will rise when its share price falls, and vice versa. Because of momentum, a well-documented market phenomenon, stocks that fall tend to continue falling, and stocks that rise tend to continue rising. So the dividend-yield factor is associated with declining—not rising—share price.


Rather than focusing on dividend yield, investors seeking a portfolio that can outperform the overall market might be better off tilting toward the value and earnings-yield factors that did, in fact, contribute meaningfully to the superior returns of the high-dividend-yield portfolio.

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