What 10 Years of Data Shows About High Yield and Low Yield Dividend Stocks


Last week, I started some work on the difference between a low yield and high yield portfolio. My first conclusion was that for a limited investment horizon (less than 20 years), the high yield portfolio seems to be the better option. In other words, this is a good rationale for retirees for aiming at companies paying dividend yields over 5%. I was quite surprised to notice that it would take 20 years for the low dividend yield portfolio to compensate with stronger dividend growth to reach the same level of distribution. Depending on how you do your calculations, the minimum time frame could go from 15 years to 30 years. Therefore, it makes a lot of sense for a young investor like me (34) to aim primarily for dividend growth. However, it is not so quite obvious if you are 65.

The last article was made with very basic assumptions as my goal was simply to see how 2 portfolios would perform over several years with a few different metrics. I wanted to have a model base before digging further. Now that the conclusion of my first model has provided a surprise, let’s pull out some real data and see how this model translates in the real world with real companies.

10 years of data used

I ran my stock filter to pull out 2 different types of stocks. The first filter was to find high dividend yield that had increased their dividend at one point in time in the past 10 years. The search included the following metrics:

Market: both Canadian and US markets (includes some ADR’s)

Dividend Yield: over 4% (I’ve been generous with my definition of “high dividend yield”, you’ll see why)

Minimum dividend growth rate for 1 year, 5 year and 10 year: 2% (I wanted to make sure that each company is able to at least keep up with inflation)

Then, I’ve also included the total return for 1 year, 3 year and 7 year. I didn’t have to do any manual calculations as Ycharts provides this information through my paid membership (yup, it’s worth it to pay for a membership when doing this kind of research!).

You can download the excel spreadsheet of high dividend yield stocks here

By using such filters, I was able to pull out a list of companies that have been doing relatively well over the past 10 years. The idea is to look solely at the dividend yield and dividend growth as these are the two main criteria for a dividend investor who’s looking for income. If I added more metrics, the list would have come very slim and this is not my point. I wanted to focus on income generation.

The filter produced 95 companies including 21 Canadian companies and 41 companies with a dividend yield between 4% and 4.99%. If one would ignore all companies paying under 5%, he would be left with 11 Canadian companies and 43 American companies. This is barely enough to create a diversified portfolio and this list shows a very limited potential for any investor to pick up companies able to pay an increasing dividend with a high yield.

I used exactly the same filters for the second list besides picking only stocks paying between 1.5% and 3.99%:

Market: both Canadian and US markets (includes some ADR’s)

Dividend Yield: between 1.5% and 3.99%

Minimum dividend growth rate for 1 year, 5 year and 10 year: 2% (I wanted to make sure that each company is able to at least keep up with the inflation)

This list includes many companies we hold in our DSR Portfolios. Since 2013, 11 of our 12 portfolios outperform their index.

I would have gladly included the 4% to 4.99% stocks in this list as I don’t really consider them as high dividend yield companies. However, this filter already gave me 40 Canadian companies and 412 American companies. This is a lot more than you need to build a strong and diversified portfolio.

You can download the excel spreadsheet of low dividend yield stocks here

Let’s compare both lists

I’ve made an average of all metrics I’ve used to generate both lists. Here are the results:

  Dividend Yield Dividend Growth (Annual) Total Dividends Paid (5 Year Growth) Total Dividends Paid (10 Year Growth) 1 Year Total Returns (Daily) 3 Year Total Returns (Daily) 7 Year Total Returns (Daily)
High Yield 6.35% 29.96% 27.83% 18.61% 0.27% 12.26% 136.20%
Low Yield 2.60% 21.57% 16.26% 12.38% 11.10% 41.48% 186.10%

Source: Author’s Table

Here again, there are some interesting results I didn’t expect. The average dividend growth is stronger among higher yielding dividend stocks for 1, 5 and 10 years. On the other hand, the low yield dividend stocks greatly outperform the high yield in total return for 1, 3 and 7 years. The difference is even more important during a more challenging market as we experienced in the last 3 years. When you look at the results of the past 12 months, 42 of the 95 high yield companies show negative total return. While income seeking investors are more concerned about their dividend payments than the value of their portfolio, this raises some concerns.

In fact, a very important point most income seeking investors point out is the importance of not withdrawing from their capital. They prefer to live from their dividend income. I totally understand this point and I think this is definitely the best scenario for any retiree. If one can live off its dividend and never touch his capital, he will live a stress-free retirement! However, if your portfolio average yield is 6.35% as mentioned above and your 12 months’ total return is 0.27%, this means that your portfolio lost 6.08% of its value. Losing capital will definitely raise some concerns for income seeking investors.

I have to mention the past 12 months haven’t been a negative period on the market. The S&P 500 total return posts 13.20% while the TSX posts 9.11% (excluding dividends, I couldn’t find the data).

I am well aware the goal of an income generating portfolio is not to match the index, but I wanted to show you how weak this portfolio performed during a good stock market. Imagine how bad the portfolio would perform during a bearish market? For the same period, the low dividend yield portfolio shows a similar return to the index (11.10%) which is perfectly acceptable.

There are 10 companies out of 95 showing a negative total return over 7 years. This meant you have roughly 1 chance out of 10 to pick a loser for the next 7 years. In comparison, there are only 12 out of 452 companies among the low yield results showing a negative total return for the same period. This represents only 2.65% chances of picking a loser for 7 years. Mathematically, it is definitely easier to build a low dividend yield portfolio than a higher yield one.

Please note that the total returns I post here are probably the best case scenario you can have. The 7 years return includes the period between mid 2009 to mid 2016; one of the strongest bull markets we have seen in decades. I’m definitely concerned about the next 5 years as I don’t think we will see such impressive growth.

Final Thoughts

Overall, I thought the difference between the high yield and low yield lists would have been more shocking. I expected the low yield to beat the high yield in pretty much every category besides the yield ;-).

While these lists are not perfect, their main flaw is that they both include companies with very strong metrics impacting the average. It is also very hard to assume the past 10 years will replicate in the next 10 years. Playing Monday morning quarterback is always easier than predicting what will happen at next Sunday game. However, I think I can highlight a few conclusions from this research:

#1 High yield stocks can perform well even considering the fact they include higher risks

#2 There are a very limited numbers of companies that can combine both high dividend yield and minimum dividend growth.

#3 Companies showing lower yield and often lower dividend growth tend to perform better over a long period of time and are more resistant to higher volatility.

#4 Losing capital has the same impact of withdrawing from your portfolio.

#5 Lower yielding stocks have a lot less chances to post a long term negative return than the higher yielding stocks.

It is possible to build a high yield portfolio, but it does include additional risk. We all wish we could live off our dividend payments, but it is not as simple as it seems. I guess the solution remains the same: start early, save monthly and review your portfolio carefully!

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