Buying stocks with a good dividend yield has been a winning strategy in the UK over time. Had you put £10,000 in the shares of the FTSE 350 High Yield Index at the end of 1985 and reinvested all the dividends, you’d be sitting on more than £214,500 today.The same starting stake tied up in the wider FTSE 350 index would have become only £152,869.
According to textbook financial wisdom, the only way you can earn better returns like this is by running greater risks. But applying the academics’ bog-standard definition of risk – volatility – high-yielding stocks had very similar levels of risk to the wider market over time.
The FTSE 350’s annualised volatility was 15.8% from late 1985 to the present, against 16% for the High Yield index. So, getting that additional gain didn’t really involve any additional pain.
The performance of high-yield investing looks even better when compared to the opposite style: low-yield investing. Whereas the FTSE 350 High Yield index has made a compound annual return of 11.4% since its birth, the FTSE 350 Low Yield Index has registered just 8.3%.
In money terms, you’d have made less than half the £214,500 you’d have notched up by investing in the High Yield index over the last three decades.
Rather than buying a straightforward UK market tracker, therefore, there may well be a case for skewing our holdings towards something that tracks higher-yielding shares.