Which one is better: investing in high dividend or low dividend stocks?

Abstract

The subject of this study is the profitability of an investment strategy focused on high dividend yield stocks, medium divided yield stocks and low dividend yield stocks from the Dow Jones Industrial Average 1987-2012, which were rebalanced annually until 2012. I follow the study of Michael B. O'Higgins, who analyzes the "Dog of Dow" investment strategy, and proposes that an investor annually select the ten Dow Jones Industrial Average stocks whose dividends are the highest fraction of their price for investment. The results demonstrate that the portfolios composed of high dividend stocks are capable of better performance than medium and low dividend stocks during twenty-six years. The results presented in this study have an important implication for investors regarding their investment choices. The high dividend yield stocks in the Dow Jones Industrial Average outperform the low dividend yield stocks over the period of study.