Dividend yield strategy in the British stock market 1994-2007

The subject of this study is the profitability of an investment strategy focused on high dividend yield stocks from the British stock market in years 1994 - 2007. We follow the study of Filbeck and Visscher (1997), who analysed this strategy for the companies listed at the London Stock Exchange (LSE) from 1984 to 1994, and construct the portfolios of Top Ten highest dividend yielding companies from the FTSE100 index, which are rebalanced annually until 2007. Our findings are also analysed in a broader context of economic significance, following the studies of McQueen, Shields and Thorley (1997) and Visscher and Filbeck (2003), by considering transaction costs and taxes. We also add the currency risk and look at the obtained results from the point of view of international investors.

The results demonstrate that the portfolios composed of the high dividend yield stocks are capable of beating the market, however this has not been happening consistently in the entire analyzed sample period. Nevertheless, the average annual rate of return of the Top Ten portfolios has been over four times as high as the corresponding change of the market index. The analysis of the most important risk-adjusted measures also indicates that the dividend yield portfolios have been a profitable investment.

The results presented in this study have an important implication for investors regarding their investment horizon choices. The high dividend yield portfolios in the British market proved to be a profitable investment in a longer run while their returns can vary in shorter periods.