Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., January 9, 2020.
Brendan McDermid | Reuters
Picking stocks with the highest dividend yield was the best strategy last decade, according to Bank of America.
But don’t expect that same strategy to work again this decade.
Stocks with the highest dividend yields quadrupled in value over the last decade, outpacing an equal-weighted S&P 500 by 120%, according to a Bank of America note published Monday. The trailing 10-year performance of stocks with the biggest dividend yields ended last year at its highest level since 2001, according to Bank of America. The firm divided up the S&P 500 into deciles by factors to find the results.
To be clear, this strategy is not to be confused with most dividend investing strategies, where investors hunt for stocks with high payouts but also dependable balance sheets.
This strategy is to blindly buy the stocks with the highest dividend yields in the market, a move that can lead investors into some of the very riskiest stocks. For example, the stock in the S&P 500 with the highest dividend yield at this time is troubled retailer Macy’s, at 8.5%. The dividend yield is the dividend per share divided by the price per share. Macy’s yield is so high because the stock price has plummeted.
The last decade had a unique set of circumstances that made these risky stocks winners.
Following the financial crisis, stock prices plummeted for financial companies and others that investors feared were on the brink of insolvency, pushing the dividend yields of those stocks to high levels. For those companies and likely Macy’s today, the high dividend yields were a sign that they were risky bets — and that those dividends may soon be cut or go away completely if a company ran into trouble or even went bankrupt.
But with the Federal Reserve keeping interest rates low, and helping offload toxic assets from the financial system through quantitative easing, those companies were able to survive as the economy slowly recovered. The low interest rates also made dividend yields more attractive relative to bond yields, and the stocks bounced back.
“Ultralow rates and a paucity of safe income opportunities likely fueled High Dividend Yield, and its close cousin Dividend Growth (+243%) also numbered among the decade’s top 5,” Bank of America said.
Though it had a strong run over the long-term, the high dividend strategy would not have been the best bet in 2019. The absolute return of the high dividend portfolio was 22.65% in 2019, while the S&P 500 rose about 29% on price alone.