Performance of high dividend yield investment strategy on the Polish Stock Market 1997-2007

The subject of this analysis is the profitability of an investment strategy focused on high dividend yield stocks from the Polish stock market. We follow the idea from Visscher and Filbeck (2003) and construct portfolios of top ten highest dividend yielding companies, which are rebalanced annually over the period of 10 years from 1997 to 2007. Due to a relatively small number of dividend paying stocks in the analyzed sample, we made a selection from the pool of all companies listed on the Warsaw Stock Exchange (WSE). The results demonstrate that portfolios composed of the high dividend yield stocks were capable of beating the market, although this did not happen consistently over the entire period under analysis. Nevertheless, the average annual rate of return of the Top10 portfolios (consisting of the 10 highest dividend yield stocks) has been over two times larger than the return of the market index. The analysis of the most important risk-adjusted measures (Sharpe and Treynor indices) indicates that the Top10 portfolios have produced abnormally large returns compared to the market return; even after accounting for risk. We present our findings also in a broader context of their economic significance, following McQueen, Shields and Thorley (1997) and Visscher and Filbeck (2003), by including transaction costs and taxes. The results presented in this study have an important implication for investors regarding their investment horizon choices. The high dividend yield portfolios proved to be profitable and generated abnormal returns in the entire sample of 10 years but their performance varied in shorter subperiods. Hence, investors should view this type of a strategy as a longer-term rather than a short-term investment.