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Income Strategies: A Study on Risk and Returns in Dividend Styles

Income Strategies: A Study on Risk and Returns in Dividend Styles

Dec. 29, 2017

Dec. 29, 2017

When it comes to investing in dividend stocks, there’s more than one approach, and each comes with significantly diverse effects on a portfolio.

A new paper by Jan-Carl Plagge, head of applied research, and William Summer, quantitative research analyst at STOXX Ltd., looks at three different income objectives: maximizing dividend payments, targeting dividend stability, and seeking both payments and low volatility.

The three produce quite distinct outcomes in terms of absolute and risk-adjusted returns as well as in dividend characteristics, the study finds, with historical performance and volatility varying among them by several percentage points a year.

Plagge and Summer consider three income strategies:

  • ●    Maximum Dividend approach, represented by the STOXX® Global Maximum Dividend 40 Index, which selects companies with the highest dividend yields.
  • ●   Quality Dividend approach, represented by the STOXX® Global Select Dividend 100 Index, selects companies with sizeable dividends but also applies a quality filter, such as a history of stable payments, in order to safeguard a steady stream of cash flows.
  • ●   High Dividend/Low Volatility approach, represented by the STOXX® Global Select 100 Index, which blends increasing dividend yields with low stock price volatility.

Table 1 looks at over 13 years of performance for the three strategies and the benchmark STOXX® Global 1800 Index.

What stands out from Table 1 is that the Maximum Dividend strategy is by far the most aggressive approach as it obtains the highest dividend yield and the biggest overall returns at a cost of higher volatility. The index also has the greatest fluctuations in both stock price and dividend yield.

Figure 1 displays both the net total return and price return performance for the Global Maximum Dividend 40 Index and the Global 1800 Index. It is notable that there is no sustained price appreciation over the sample period for the dividend index, meaning that the entirety of the total performance is generated from dividend income.

Figure 1: Performance of STOXX Global Maximum Dividend 40 Net Return and Price Return (EUR) 21/06/2004 – 17/10/2017. Blue Shaded Area: STOXX Global Maximum Dividend 40 Live Performance (Launch date: 16/10/2015).

Moreover, the study finds there is a marked rise in cumulative average abnormal returns for the maximum dividend strategy prior to the ex-dividend date of constituents.

Seeking stability in income

In the case of the Global Select Dividend 100 Index, the composition of returns is more balanced, with 64% of returns being attributable to dividends and 36% deriving from stock-price appreciation.

Finally, the Global Select 100 Index shows a return decomposition that is almost evenly distributed (49%-51%), creating the most balanced strategy. In the case of this High Dividend/Low Volatility approach, the ability to generate both high dividend yield as well as strong stock-price returns is partly driven by the so-called low-volatility premium. This refers to the empirical observation that stocks with low volatility exhibit higher returns than companies with highly volatile stock-price movements.

Investors who would like to take a more conservative approach may hence prefer the Quality Dividend or the High Dividend/Low Volatility strategies, which aim at a trade-off between increasing dividend yields while paying attention to “stability.” Even when this comes at a price of lower yields and total return (Table 1). Also, strategies incorporating low volatility screens tend to carry higher valuations, the paper finds.

Also in the topic of valuations, the study concludes that price-to-earnings ratios for all three dividend strategies have tended to be cheaper than that of the broad equity market.

Finally, the paper looks at the geographic allocation of the three dividend approaches, as diverging dividend calendars and policies in each region will tilt the overall geographic exposure of the portfolio.  

Different approaches, distinct results

In summary, constructing an equity income portfolio can be done in several ways. Empirical analysis demonstrates the extent of the various effects any given strategy will have on risk and returns, something key for investors as they select the approach that best suits their needs.  


Featured indices

STOXX Global Maximum Dividend 40 Index

STOXX Global Select Dividend 100 Index

STOXX Global Select 100 Index


 “Bird in Hand – Three Approaches to Generating Income from Dividends,” STOXX, Dec. 2017.


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