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Potential Applications Of The Low Volatility High Dividend Concept In Brazil

Published Wed, 14 Aug 2019 07:00:15 -0400 on Seeking Alpha

By Maria Sanchez
Historically, the percentage of dividend payers in Brazil has ranged between 71% and 87%,[1] making it a propitious environment for implementing dividend-focused strategies. The highest-yielding stocks in high-yield strategies often come with greater portfolio volatility,[2] and Brazil is no exception. This blog explores the rationale behind the implementation of a low volatility high dividend strategy in Brazil and its potential benefit.
Low volatility high dividend strategies aim to provide yield at a reasonable risk level. To review the characteristics of high dividend yield stocks in Brazil, we separated dividend payers from the S&P Brazil BMI universe into hypothetical quintiles based on yield. Securities in each quintile are equal-weighted and held for 12 months. Our results showed that the securities in Quintile 1 (the highest dividend-yielding stocks) had the highest average 12-month holding period returns (see Exhibit 1).

Then, we went through the same exercise but based the quintiles on their 12-month trailing volatility. As shown in Exhibit 2, securities with lower volatility (Quintiles 1 and 2) had higher risk-adjusted returns (0.56 and 0.55, respectively) while securities in the higher volatile buckets (Quintiles 3, 4, and 5) had much lower risk-adjusted returns (0.28, 0.34, and 0.24, respectively).

Our approach to combine high yield with low volatility consisted of two steps. First, we selected the top 50% of stocks... Read more