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Here are my observations on the Net Payout Yield (NPY) strategy.


I have read in other places that the NPY may have been returning over 19% per year for the past 20 or so years. Also, the Small Dogs have been yielding around 19% to 20% over the past several years. The Small Dogs are the lower priced 5 of the highest yielding (dividend) 10 DOW stocks. Since the Small Dogs formula still uses "dividend yield" I am continuing to examine the NPY.

[While the study included Dividend Yield, Payout Yield (measured two different ways), and Net Payout Yield, for simplicity and readability I am limiting the following discussion to ONLY the Dividend Yield and the Net Payout Yield.]

While there were parts of the study (statistics) that I did not understand, the parts of the scholarly article that I understood were significant.

(A) The demise of the performance of the Dogs of the Dow based on Dividend Yield is fully explained by the change in corporate payouts to shareholders through share repurchases (net of share issuances). This practice of share repurchases began after a ruling by the SEC in 1982, which provided safe harbor (legal protection?) for companies who chose to do repurchases.

(B) The predictability of future returns on equity holdings is very highly correlated to yields based on NPY. This predictability and amount of returns is much better for NPY than Dividend Yield. The study divided the universe of stocks studied into deciles from lowest yields to highest yields (for NPY and for Dividend Yields). The returns were measured in average monthly returns for a period from July 31, 1984 to December 31, 2003 (234 months). Returns for NPY were much better than returns for Dividend Yield.

(C) A study of portfolios was done for the same period grouping the deciles into highest 3, middle 4, and lowest 3. While the average returns (and total returns) were significantly greater for NPY, the volatility was down right frightening for the NPY.

I am now searching for other NPY strategies that have been back tested. I would like to see if any of the other Dog-like strategies show consistently good results, but without the very high volatility. I am particularly interested in an NPY strategy similar to the High Yield Dow (HYD) strategy followed by the American Institute for Economic Research (AIER) as described in their booklet "How To Invest Wisely." (This HYD strategy is also followed in the Investment Guide, a publication of the American Investment Services, Inc. (AIS).)

I would also like to hear from anyone who has information on this.
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