Dividend yield and stability versus performance on the German stock market: a descriptive study

It is often examined in the literature whether the dividend yields of stocks correlate with their total returns. This paper analyzes the effect of dividend yield on return as well as on risk and on performance of stocks and stock portfolios on the German market. Not only the influence of dividend yield but also of dividend stability is subject to our analysis. Furthermore, tax aspects are considered. However, this study should rather be seen as an empirical analysis of the influence of dividends as a capital market anomaly than a theoretical based validation approach. Our data set comprises daily adjusted stock prices and dividend payment data from the German capital market over the period 3 January 2000–31 July 2008. This period was characterized by a high volatility of the stock market. In addition to the existing literature examining mainly the long-term influence of dividend yields, we also want to find out whether stocks with high and stable dividend payments are able to reduce the risk of a stock investment in short time periods characterized by extreme conditions. We use blue chips (DAX), stocks of medium-sized companies (MDAX), and stocks of technology firms (TecDAX). Our findings suggest that stock performance generally improves with an increasing dividend yield, where this result is actually based on risk reduction instead of a higher return. However, this risk reduction diminishes with an increasing degree of diversification.