High Yield, Low Payout

Abstract

High Yield and Low Payout What is the optimal combination of dividend yield and payout ratio for the investors? We tested companies within the S&P 1500 and found that investors should look for companies with a high yield and low payout ratio for their portfolios. The high dividend yield and low pay out ratio basket of stocks had the best performance in our backtest since 1990.

Dividend Yield How has the plain dividend yield strategy worked over the years? Stocks with high yields generally outperform those with low yields. The highest-dividend-yielding stocks were not overall leaders. Stocks ranking in decile eight had the best performance.

Return Contribution of Dividends Dividend contribution to total returns was more than 40% from 1926 to 1990. The 2003 tax reduction on dividends has encouraged companies to increase their dividends; dividends' contribution to total return has risen and will continue to rise in coming years.

Keywords: Dividend Yield, Payout Ratio