DIVIDEND YIELD INVESTMENT STRATEGIES: Empirical Evidence from the S&P 500 index
Juvonen, Roope (2018)
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Tiivistelmä
This study analyzes the performance of different dividend yield strategies against the S&P 500 index. Time period for the study is from the year 2001 to the year 2017. Dividend yield strategies used in the study are commonly known as the ‘Dogs of the Dow’ strategies, where investor chooses the top 10 highest dividend yield companies (DoD–10) from an index and holds the equally balanced portfolio for one year. Additionally, the DoD–5, where investor chooses from the DoD–10 portfolio the five cheapest stocks and holds them for one year, and the DoD–1, where investor chooses from the DoD–5 portfolio the second least expensive stock and holds it for one year, strategies are examined.
The performance of the portfolios are analyzed on absolute and risk–adjusted bases. Market–adjustment model and ‘Modigliani–squared’–adjustment are used to measure abnormal returns, and for the risk–adjustments both the Sharpe ratio and Treynor index are used. Tax and transaction costs are also calculated for economically accurate results. Finally, the DoD portfolios are tested against market downturns.
The empirical results indicate that the DoD portfolios clearly outperform the market index. The average annual abnormal return for the DoD–10 portfolio is 15.9 %, for the DoD–5 portfolio 21.6 % and for the DoD–1 portfolio 35.6 %. However, none of the annual returns are statistically significant. Returns analyzed on monthly basis show statistical significance and the DoD portfolios outperforming the market. After the tax and transaction costs the DoD portfolios returns analyzed on both annual and monthly basis are still positive, and only the DoD–10 portfolio is statistically significant on monthly basis. Finally, this study provides information that the DoD portfolios cope extremely well during market downturns.
The performance of the portfolios are analyzed on absolute and risk–adjusted bases. Market–adjustment model and ‘Modigliani–squared’–adjustment are used to measure abnormal returns, and for the risk–adjustments both the Sharpe ratio and Treynor index are used. Tax and transaction costs are also calculated for economically accurate results. Finally, the DoD portfolios are tested against market downturns.
The empirical results indicate that the DoD portfolios clearly outperform the market index. The average annual abnormal return for the DoD–10 portfolio is 15.9 %, for the DoD–5 portfolio 21.6 % and for the DoD–1 portfolio 35.6 %. However, none of the annual returns are statistically significant. Returns analyzed on monthly basis show statistical significance and the DoD portfolios outperforming the market. After the tax and transaction costs the DoD portfolios returns analyzed on both annual and monthly basis are still positive, and only the DoD–10 portfolio is statistically significant on monthly basis. Finally, this study provides information that the DoD portfolios cope extremely well during market downturns.