Dividend-yield, an indicator for successful trading? : - A study of dividend-yield’s impact on total stock return on the Swedish stock market

Abstract: Maximizing returns are most investors’ main concern and throughout the years plenty of strategies have been developed in order to reach this goal. What they have in common is that they claim to outperform the market, which should not be possible considering theories such as the Efficient Market Hypothesis. The Dogs of the Dow is such a strategy and it is built upon the simple idea that you invest in stocks with high dividend-yield. In this study, we will search for evidence that dividend-yield could work as an indicator for what stocks to invest in if you want to maximize your total stock return. The study is conducted on the Stockholm stock market where there is a clear lack of information regarding the dividend-yield and total stock return relationship. We will examine historical data for thirteen years and as such our study is completely quantitative. The purpose is to answer the following research question; “What is the relationship between dividend-yield and total stock return for stocks on the OMX Stockholm Benchmark Index during different trends of the Stockholm stock market during 1999-2011?” In the processes of answering our research question, we have been conducting statistical tests where the linear regression at the heart. Multicollinearity has been addressed through a Pearson Correlation test. Without considering tax or transaction costs, there was indeed a statistically proven positive relationship between the dividend-yield and the total stock return for the entire period. When examining the sub-periods, which have been divided according to the market trend of the stock market as well as year by year, it is however only possible to ensure the relationship on statistical grounds for some periods. The majority of results indicate a positive relationship between the two variables, even though they might not be statistically proven. Moreover, the relationship did not seem to be linear as zero dividend-yielded stocks had a higher average total stock return compared to the whole sample looking at the entire period. In conclusion, it has been more profitable to follow a strategy that is advocating a portfolio selection of stocks with high compared to low dividend-yield.