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Looking at the Evidence

Over the last few decades, researchers have explored whether buying stocks based upon their dividend payments is a good strategy. Some of these studies look at the broad question of whether stocks with higher dividend yields deliver higher total returns. If the dividend story holds up, you would expect stocks with high dividend yields to also earn high returns. Others take a more focused approach of looking at only those stocks that have the highest dividend yields. One example is the Dow Dogs strategy, whereby you buy the 10 stocks in the Dow 30 that have the highest dividend yields. In recent years, a third strategy of buying stocks that have the biggest increases in dividends (rather than the highest dividends) has also been tested. In this section, the empirical evidence that has accumulated on all of these fronts is presented.

Do Higher Yield Stocks Earn Higher Returns?

The dividend yield is usually computed by dividing the dividends per share by the current stock price. Thus, it is defined to be


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