Volume 14, Number 3, Third Quarter 2016
Wai Mun Fong and Zhehan Ong
Stocks with high dividend yield (DY) have value-like returns and defensive qualities that make them highly attractive to investors. We show that this investment strategy can be powerfully enhanced by choosing stocks with both highDY and high gross profits-to-assets (GPA). Consistent with the predictions of the clean surplus accounting model, high-GPA stocks have high average returns despite their relatively low book-to-market ratios (Novy- Marx, 2013). Profitable firms are also less prone to distress than unprofitable firms. The resulting Profitable Dividend Yield (PDY) strategy inherits the defensive nature of high- DY stocks, while providing superior average returns than either standalone strategies. Bootstrap simulations show that the PDY delivers superior long-term outcomes.