Northern Trust research shows how portfolios focused on quality dividend-paying stocks can enhance investment outcomes.
Equity market turbulence often plays havoc with institutional investors'portfolio objectives, whether it’s leaving a liability stream uncovered or jeopardizing the funding for a spending plan. As a result, investors seek strategies that enable them to minimize portfolio fluctuations without sacrificing return-generating capabilities.
A recent paper from Northern Trust provides details on proprietary research that demonstrates that a Quality Dividend Focus (QDF) strategy outperformed portfolios focused solely on high quality or high-dividend yield, as well as an intersection portfolio, during different market cycles.
Four separate studies tested various aspects of a quality strategy weighted by the dividend yield of stocks.
1. Quality – A quality factor was created using fundamental financial statement data of dividend paying stocks, to rank companies based on their ability to sustain and grow their earnings and cash flow. Companies with favorable scores based on the quality factor provided positive relative returns with strong information ratios; however, since the quality factor does not contain a valuation component, there were periods of underperformance based on the premium or discount the market assigns to quality companies.
2. Dividend Yield – In isolation, high-dividend-yielding stocks showed positive relative returns with low information ratios.
3. The Intersection of High Quality and High Dividend Yield – An intersection portfolio of high-quality and high-dividend-yielding stocks outperformed the top quality and top dividend-yield portfolios on a stand-alone basis, but contained biases that led to underperformance during various market cycles.
4. High-Quality and High-Dividend-Yielding Stocks in QDF Portfolio Construction – Finally, a well-constructed portfolio utilizing the Quality Dividend Focus strategy eliminated those biases and provided persistent excess returns throughout different market cycles, such as increasing and decreasing interest rate environments, value and growth markets, rising and falling markets, and markets where small capitalization companies outperform large capitalization companies.
To learn more about these studies, download the “Quality, Dividends and Portfolio Application” paper.