23 Pages Posted: 15 May 2012
Date Written: April 22, 2012
One place of particular recent investor interest has been dividend investing. Dividend investing has historically outperformed both the broader market and value investing, and at the same time shown lower risk. Dividend investing ‘overlap’ with both value investing and low-volatility investing, but is an independent investment style of its own. The specific reasons for the outperformance of dividend investing are a reduction in the agency costs associated with high free cash flows and a probable systematic mispricing (undervaluation) of high dividend paying stocks. Dividend investing sees fewer years with losses, which according to prospect theory adds significant utility to investor experience. The outperformance of high dividend yield stocks has been robust over the 1928-2011 timeframe. Since the underlying reasons for this outperformance are more behavioral in nature than institutional, chances are that history will repeat itself.
Keywords: Dividend investing, agency cost of free cash flows, systematic mispricing of high dividend paying stocks, value premium, beta puzzle, investor utility
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