If you are a stock market investor interested in maximizing stocks returns, you should first be aware of the financial principles arguing that it's impossible to do so. The first is Eugene Fama's Efficient Market Hypothesis, which argues that millions of competitive investors all battling for maximum returns make the market incredibly efficient, and stock prices immediately reflect all available information, making beating the market extremely difficult. The second point to be aware of is Random Walk Theory by Burton Malkiel, which shows that stock prices are random as a result of this competition, no fund manager can consistently beat the market, and picking winning stocks is impossible.
The good news is that not all research agrees with these assertions. Below is some research showing that high dividend yield stocks outperform market averages.
Research Showing the Higher Returns Stocks With High Dividend Yields
One excellent paper by Tweedy, Browne called The High Dividend Yield Return Advantage showed that from 1955 through 1988, the 10% of stocks with the highest dividend yields had average annual returns of 19.3% compared to 13.0% for the market.
Another paper called Dividend Yield vs. Dividend Growth by O’Shaughnessy Asset Management showed that from 1930 through 2011, the top 10% of stocks with highest dividend yields had annual returns on average of 11.6% vs. 10.2% for the index of all US stocks.
Quantitative Analysis: Global Dividend Strategy by Credit Suisse showed similar findings. However, they showed payout ratio is also a critical factor. They proved high yield, low payout ratio stocks generally were the most successful stocks. From 1990 to 2008, one study showed that the stocks with this combination had average compound annual returns of 15.4% vs. 8.4% for the S&P 500.
That's Great, But Has it Been Working in Practice?
Unfortunately, funds using this strategy have not been performing well lately. Taking a look at the Tweedy, Browne (who have written one of the excellent pieces cited above) Worldwide High Dividend Yield Value Fund (TBHDX), which exploits these stocks they have researched, the recent performance has not been exciting.
As you can see, TBHDX (based on the winning principles from the research), lost to the S&P 500 by a few percentage points from inception through December 2013.
Should High Dividend Yields Be a Part of Your Investment Strategy?
Analyzing high dividend yield funds from the last several years isn't promising; although the research says they should be beating the market, they've been lagging by a few percentage points recently. Given the decades of sound research, however, this method is well worth a shot for the long-term, as nothing can beat the market all the time.