Why Higher Yield Does Not Mean Higher Return

by: Discount Fountain


A regression analysis study of the Dividend Aristocrats indicates that higher yield generally means lower return.

For income-oriented investors, stocks with a 2-3% dividend yield may be the most effective at capturing gains from both dividends and capital appreciation.

Several aristocrats trading in the 2-3% range have a 30+ year history of consecutive dividend increases, and may be more sustainable than their higher-yielding counterparts.

If one stock pays a higher dividend yield than another, does that mean it pays a higher return overall? Looking at the yields vs. returns of the Dividend Aristocrats, it appears that higher yield actually results in a lower overall return. In this article, I use regression analysis to demonstrate that higher yields are correlated with lower returns, and vice versa.

Regression Analysis

My regression model is as below, and both the dataset and regression output are available here.

1-Year Return = Intercept + β (Payout Ratio) + β (Dividend Yield) + β (Years of Consecutive Dividend Increases)


The dataset yielded the following regression model:

1-Year Return = 47.00640 - 11.10160 (Dividend Yield)

Note that the Dividend Yield variable is highly significant at all levels but our p-values indicate that there is no evidence of a relationship between a company's 1-Year Return and its Payout Ratio or Years of Consecutive Dividend Increases. We can see that a 1% change in a company's dividend yield is correlated with a -11.10% change in the company's 1-Year Return. While there are outliers, this model is telling us that generally, the higher the yield, the lower the rate of return.

Model Output


For income-oriented investors, yield is clearly an important source of investment returns. However, one must always be weary of sacrificing capital gains in the process. We can see that returns dip sharply once we move into 4% yield, and returns become negative at higher thresholds. In addition, just because a company pays a high yield today, doesn't mean it always will. Take the example of Citigroup (NYSE:C), which at a 7% yield was one of the highest yielding stocks around. However, the company became a classic example of how such yields are often not sustainable, and Citigroup's 5-Year Average Dividend Yield currently stands at 0.5%, which is well below many of its peers.

In my opinion, investors who wish to yield a steady income from their investments while also enjoying the benefit of capital appreciation would do well to consider stocks with yields in the 2-3% range. In the case of the dividend aristocrats, the below companies have shown a rate of return of above 15% in the last year, and have shown consecutive dividend increases for at least the past 30 years. These companies appear to have a good blend of both dividend increases and capital appreciation, and may be of interest to income-oriented investors:


It should be noted that due to the nature of this study, these results are not universal and one may well find stocks that have a high yield with a high return and vice versa. As this is a cross-sectional dataset, the 1-year rate of return is somewhat short-term oriented. However, in my opinion the performance gap between lower and higher yielders can be generalizable to longer time periods. Intuitively, the larger the payments a company makes to its shareholders, the less it is reinvesting in the business. Such yields are not sustainable in many cases.

Disclosure: The author is long CVX, WFC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.