PT  - JOURNAL ARTICLE
AU  - Wai Mun Fong
AU  - Zhehan Ong
TI  - The Long and Short of Profitable Dividend Yield Strategies
AID  - 10.3905/jwm.2016.18.4.124
DP  - 2016 Jan 31
TA  - The Journal of Wealth Management
PG  - 124--137
VI  - 18
IP  - 4
4099  - https://pm-research.com/content/18/4/124.short
4100  - https://pm-research.com/content/18/4/124.full
AB  - High dividend yield stocks appeal to many investors, but their value-like characteristics raise concerns about payout sustainability and firm distress risk. We address this concern by forming portfolios comprising stocks that have high gross profitability and high dividend yield. The resultant “combo” strategies inherit the defensive qualities of high yield stocks in bad times while underperforming the market portfolio only modestly in good times. Averaged across market cycles, combo strategies exhibit low volatility and high Sharpe ratios reminiscent of “good deal” investments (Cochrane and Saá-Requejo [2000]). Comprehensive evidence shows that the high returns of such combo strategies are driven by the underpricing of low-risk stocks and the same behavior forces that underlie the well-known beta anomaly. These deep-seated forces suggest that the combo approach will continue to work well in the future.TOPICS: Fundamental equity analysis, portfolio construction, performance measurement