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Income illusions: challenging the high yield stock narrative

Author

Listed:
  • Yin Chen

    (NDVR, Inc.)

  • Roni Israelov

    (NDVR, Inc.)

Abstract

While stocks with high dividends have historically outperformed those with low dividends, we show that the difference can be completely explained by a set of well-known factors including value, quality and defensive. Applying a dividend filter to a portfolio of strategies having high exposure to these factors yields sub-optimal results. To test whether incorporating dividend yields can improve the performance of long-only factor portfolios, we construct a set of dividend-favored long-only factor portfolios with a heuristic rebalance algorithm and find that their after-tax net returns are lower than the dividend-agnostic counterparts. Collectively our results indicate that long-only active investors are better off loading directly on value, quality and defensive factors than purposely tilting their portfolios toward high-dividend stocks.

Suggested Citation

  • Yin Chen & Roni Israelov, 2024. "Income illusions: challenging the high yield stock narrative," Journal of Asset Management, Palgrave Macmillan, vol. 25(2), pages 190-202, March.
    • Handle: RePEc:pal:assmgt:v:25:y:2024:i:2:d:10.1057_s41260-023-00340-1
    DOI: 10.1057/s41260-023-00340-1
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