Day 4: The Dividend Key – High Dividend Stocks and the Risk and Reward Balance

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.

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The 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)