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On Thursday the post in The Dividend Key series talked about High Dividend Stocks and how they performed better than low dividend stocks. One thing I mentioned in that article was how the highest dividend stocks produced better returns with less risk. There is another study on dividends that talks more in depth about this risk / reward relationship. The study conducted by Lehman Brothers went back to 1970 and saw that the top-quintile of high dividend stocks produced a higher return with less risk than the lower quartiles did. Take a look at the attached chart to see this in action.
Click to EnlargeThe Q1 stocks, or the stocks with the highest dividend yield produced a return of 13.7% with a 15.5% standard deviation. The Q5 stocks, or the stocks with the lowest dividend yields, produced a lower return of 9% with a standard deviation of 29.1%. In essence, with high dividend stocks you take on less risk for higher returns. That is the scenario we all strive for when investing.
Source: Tweedy Browne Company LLC (link opens a .pdf document)
(Photo Credit: daniel wildman)
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I am always leery about those stocks with the very highest dividend yields. Generally a stock with a dividend yield that looks too good to be true, is indeed too good to be true. The consistently growing dividends are what I like to look for.
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I’ve been investing in AINV and CSE lately. Both have relatively solid balance sheets.