High Dividend Stocks and Value Investing

/High Dividend Stocks and Value Investing

High Dividend Stocks and Value Investing

By | 2017-08-18T17:03:50+00:00 June 18th, 2015|Value Investing Research, Uncategorized, $syld, $iwd|8 Comments

Barron’s recently ran an article (written by Research Affiliates), which is titled “Get Smart About Picking Dividend-Rich Stocks.” The article highlights that high-quality high-dividend-paying stocks outperform low-quality high-dividend-paying stocks. The quality of the firm is measured by profitability, financial distress, and accounting red flags.

We investigate a Simpler Way to Identify Top-Performing Dividend Stocks

We sort the high dividend-paying firms by a simple value investing measure–EBIT/TEV. We choose this value investing measure based on our own research discussed here.

First, let’s set up the experiment.

We examine all firms above the NYSE 40th percentile for market-cap (currently around $1.8 billion) to avoid weird empirical effects associated with micro/small cap stocks. We form the portfolios at a annual frequency with the following 2 variables:

  1. Dividend Yield = Cash dividends / market capitalization. Assessed on 6/30 each year.
  2. Value = EBIT/(Total Enterprise Value). Assessed on 6/30 each year.

Here we describe the four portfolios we examine. All portfolios are annually rebalanced on 6/30 each year.

  1. Top Div. Quintile, High Value EW = Top quintile of firms on dividend yield, then choosing the top half on Value. Portfolio is equal-weighted.
  2. Top Div. Quintile, Low Value EW  = Top quintile of firms on dividend yield, then choosing the bottom half on Value. Portfolio is equal-weighted.
  3. Top Div. Quintile EW  = Top quintile of firms on dividend yield. Portfolio is equal-weighted.
  4. Universe EW = Total return on the universe of securities. Portfolio is equal-weighted.

Results are gross of management fees and transaction costs. All returns are total returns and include the reinvestment of distributions (e.g., dividends).

Here are the returns (1/1/1964-12/31/2014):

Value Investing Portfolio Results:

dividend and value 2

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.


  1. The top quintile of dividend paying firms outperformed the universe over the past 50 years when comparing CAGR, Sharpe and Sortino ratios (comparing column 3 to column 4)
  2. Splitting high dividend-paying firms by value worked historically. Column 1 (top dividend payers, high value) outperformed column 2 (top dividend payers, low value) across all performance measures — CAGR, Sharpe and Sortino ratios.


The results suggest that a sort on a simple value investing measure works well at sorting dividend stocks. Compared to the more complex quality screen proposed by Barron’s, this sorting variable is a good alternative for investors who prefer high dividend stocks.

  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).
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About the Author:

Jack Vogel
Jack Vogel, Ph.D., conducts research in empirical asset pricing and behavioral finance, and is a co-author of DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His dissertation investigates how behavioral biases affect the value anomaly. His academic background includes experience as an instructor and research assistant at Drexel University in both the Finance and Mathematics departments, as well as a Finance instructor at Villanova University. Dr. Vogel is currently a Managing Member of Alpha Architect, LLC, an SEC-Registered Investment Advisor, where he heads the research department and serves as the Chief Financial Officer. He has a PhD in Finance and a MS in Mathematics from Drexel University, and graduated summa cum laude with a BS in Mathematics and Education from The University of Scranton.
  • dph

    Have you found better results screening for dividend payers that have also increased their dividends over 5,10,15…years? Maybe narrow the top value quintile further by this parameter (increased dividends)?

  • not in this particular study, but yes, in general, increased YoY dividends are a positive signal.

  • kikocherman

    How do you guys perform these back tests so quickly?

    I am writing my undergraduate paper and want to learn how to do back tests like that.


  • Corpraider

    You may have covered this in a prior post (sorry if I missed it), but I would be interested in seeing some of these dividend consistency, low payout, strong shareholder yield and/or consistency in growth of the dividend (like a VIG/DJ Divvy 100), as the proxy for quality or the “QMJ” factor, combined with the ebit/ev and maybe some other ways to tilt to value. Just for shiz and giggles. Seems like the yield consistency or growth is a simple way to get some quality exposure and is harder to be hurt by agency problems or mislead by the financials. Also, congrats on the Kiplinger’s mention.

  • Jack Vogel, PhD

    Years of working on the data!

  • Jack Vogel, PhD

    Here is a paper we have that examines the payout percentage:


    We find some evidence that using payout percentage within a yield category can systematically improve portfolio performance.

    I hope that helps!

  • Steve

    I find this quite an amazing result, considering the primary factor is dividend yield, and not a super-charged version like the sharholder yield etc. That’s a decent sized spread between the performance metrics of the cheaper divs vs. the more expensive divs. The CAGR might not be as jaw dropping as some methods, but it’s still very market beating and the volatilities are certainly going to be appreciated by a conservative investor. Not to mention, there are only 2 rules!

    Given that this is about investing for dividends, do we know what the breakdown of the forward return was? i.e. how much of that 15.24% (10.97%) was paid as a dividend?

  • Jack Vogel, PhD

    Not sure — may be worth a future post!