What is your definition of “high dividend?”

As the markets continue to lack volatility, a number of investors are attempting to find opportunities outside of the traditional growth stocks. This leads many of them to alternatives such as forex, options, etc. However, some investors are still attempting to find gains in the equity markets, and a number of them are doing so through looking for companies with exceptionally high dividend yields.

How high are “high” dividend stocks?

As the markets continue to lack volatility, a number of investors are attempting to find opportunities outside of the traditional growth stocks. This leads many of them to alternatives such as forex, options, etc. However, some investors are still attempting to find gains in the equity markets, and a number of them are doing so through looking for companies with exceptionally high dividend yields. I have a little experience in dividend investing, but not enough to give my thoughts on the matter without running a few tests.

Above we have created a simple stock screener that ranks all companies in the market based on their dividend yield and returns the top 25% of them. Though this screen is complete, it doesn’t really give us the whole story – leaving me with two questions:

  • What is the average dividend yield annually for the top 25% dividend producing companies?
  • How well does this perform historically?

I went ahead and ran a backtest since 1995 to see how well these companies performed, as well as plotted the dividend yield of the companies taken on in this strategy which were then averaged out.

To my surprise, the strategy actually beats the market over the 22 year period. Typically, when I think of high dividend stocks I think of companies that are attempting to lure in investors and promising a dividend rate that they physically cannot afford; but, in this instance, I may have to eat my words.

BUT, if you take a look at the average dividend offered by these companies you’ll notice something kind of strange. It’s fairly reasonable. As of right now, the average dividend offered by the top 25% is less than 0.08, or 8%. When people talk to me about looking for high yield stocks they never mention companies in this yield range. Rather, they are looking for companies that are going to give them 0.1 or higher. Let’s give that a try.

By adjusting the screener slightly we can isolate those companies that people identify as having a high dividend yield. If you’re new to the Equihack language, this argument simply states that we are taking all companies with a dividend yield of greater than 0.08(8%) and ranking them based on that yield. We are then taking only the top 25% of yields as we did before. This will ensure that the average dividend yield over the period is going to look more like what high yield investors are looking for.

That drastically changed our overall returns. By isolating only the highest yield companies we have significantly increased volatility, lowered returns, and had to deal with countless delisting’s. The average yield for the positions taken on is much higher than before – now sitting at around 0.2. You should also note that the returns offered in this backtest are adjusted for any dividends given so you are looking at your real returns. I’m certain there are parameters that can be changed that can turn this into a winning strategy; but, at its core, I would be hesitant to pursue a strategy that includes companies that seemingly have to bait investors into purchasing their stock with dividends.

About Tyler McCain

A student of finance at Georgia State University, Tyler has had a passion for the world of finance for as long as he can remember. Joining the Equities Lab team in 2015 he attempts to juggle the perfect mix of school, work, and giving back to the community. When he isn't working at Equities Lab he can often be found helping teach programs at the Rosen Family Foundation - a non-profit that teaches financial literacy to middle and high school students.

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1 Comment

  1. Tyler – Good analysis as usual. However, I think further understanding of why the dividends might be high can lead users to potentially pick better dividend companies. Generally the board and executives are large shareholders and thus there is motivation to continue to raise the dividends, not just to attract other investors. Furthermore, we are dealing with dividend yield percentages here so the percentages are a function of the stock price since the cash dividend remains constant or increases before it might get cut completely(very rarely will a cash dividend ever be decreased instead of cut). That is why when you require it to be above 8% the screener is likely purchasing stocks with a declining price and when the price increases they actually drop out of the screen(unless they rapidly increase cash dividend).

    It would be interesting if another user takes this a step further and posts a quality dividend screener in the comments here. A good starting point might be high F-score and high dividend yield. Or one might analyze the consistency of increases to the cash dividend.

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