Investing In High Dividend Yield Stocks: A Sucker Bet?

Beware of focusing an investment decision on "yield." In this piece, we want to highlight that investing in high dividend yield stocks - without considering the valuation - is probably a BAD idea. We've noticed that many market participants point to the historical performance of high dividend yield investing as a way to outperform the benchmarks. Well, it turns out that this is true, but misleading. Jack and I published a paper on the subject of high-yield strategies a few years ago. A copy of the paper can be found here. The bottom line is as follows: "High dividend yield stocks do not reliably earn above-average risk-adjusted returns. More complete measures of shareholder yield, which account for net share repurchases, perform better."

If you are venturing into high dividend yield funds in the hopes you will earn some extra income, you might be in for a nasty surprise. As Ben Graham discussed in the past, intelligent investing is about buying stocks with a margin of safety... he didn't suggest that investors focus on high-yield stocks. Let's repeat: value investing is about buying stocks with a margin of safety. In other words, focus on cheap stocks where expectations are lowest and fundamentals are sound. Put differently, buy value investing funds that focus on cheap, high-quality firms, not dividend yield funds that buy expensive, relatively low-quality firms.

Source: Seeking Alpha

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