The long-run behaviour of high-dividend yielding stocks: income implications for investors
Barron, Scott W.
This study examines the relative performance of bond interest income and stock dividend income. It has long been the recommendation of financial planners that bond income is the most appropriate investment income during retirement years. The purpose of this paper is to prove that in fact dividend income from stocks contains substantial growth properties that make it a more attractive income investment vehicle during retirement years. Past research has examined dividend yields in depth and comparisons of these yields to bond yields have also received some attention. However, little research has been done on the growth opportunities of dividend dollars over extended periods of time. To fill this void in the literature, this study examines a high-dividend yielding portfolio comprised of Canadian stocks over the years of 1980-1999. Its performance is then compared to long-term and medium-term bond portfolios, as well as to an aggregate (TSE 300) dividend portfolio. An additional comparison is made to a portfolio of banking stocks, as well as a buy-and-hold strategy. The period of 1957-1999 is also examined, however, only for the aggregate-dividend and bond portfolios. To aid in the evaluation sampling with replacement, a form of bootstrapping method, is performed. Using independent random draws from the population of returns an analysis of various holding periods is made for the dividend and bond portfolios. The results obtained from this thesis strongly favour dividend income over bond income. Examining investment horizons of 5, 10, and 20 years, yields the conclusion that due to comparatively significant growth properties, dividend income is comparatively more attractive than bond income, especially as the holding period is extended. Further, in many cases the variability in income obtained from the dividend portfolio is much lower in comparison to the bond portfolios. In this respect the findings here support the general consensus in the literature that dividends follow a smooth, consistent pattern. As an added bonus, the high-dividend portfolio also demonstrates substantial capital gain opportunities.