Income illusions: challenging the high yield stock narrative

Yin Chen () and Roni Israelov ()
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Yin Chen: NDVR, Inc.
Roni Israelov: NDVR, Inc.

Journal of Asset Management, 2024, vol. 25, issue 2, No 6, 190-202

Abstract: 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.

Keywords: Equities; Dividends; Income; Active investment; Portfolio construction; Investment tax (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41260-023-00340-1

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