Resist the Siren Call of High Dividend Yields

The Dividend Factor Tends to Yield Negative Returns

October 2017. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Buying high yielding and selling low yielding stocks has been an attractive strategy since 2000
  • However, it has been a highly unattractive strategy over the last century
  • Investors should resist the Siren call of high yielding stocks and focus on other factors


The search for yield has led investors and savers to consider quite adventurous investments in recent years. One contender for the top 10 list of most risky investments might be Argentina’s 100-year bonds given that the country defaulted on their bonds not too long ago. Mozambique’s bonds for its fleet of tuna ships could also be considered. In equity markets product providers have serviced the demand for yield by issuing dividend yielding products and about 20% of all smart beta ETFs are dedicated to this investment style. Given the immense interest in these products it’s worth evaluating the soundness of this strategy. In this short research note we will analyse the Dividend Yield factor across the globe (try Finominal’s Portfolio Diagnostics for portfolio analysis).


We focus on the Dividend Yield factor, which buys high yielding and shorts low yielding stocks, in all developed markets in Asia, Europe, and the US. We exclude any stocks with zero dividend yields. The factor is constructed as a beta-neutral long-short portfolio by taking the top and bottom 10% of the stock universe in the US, Europe and Japan and 20% in smaller stock markets. The analysis covers the period from 2000 to 2017 and includes costs of 10 bps per transactions.


The chart below shows the dividend yields for the portfolios with the highest and lowest yields across the globe. We can observe the largest discrepancy between high and low yielding stocks in the US, where some sectors, e.g. the Master Limited Partnerships (MLPs) of the energy sector, offer remarkably high dividend yields. Japan offers the lowest spread, which is to be expected given that the country’s central bank has pursued a low interest rate strategy for two decades.