Outperformance through dividend strategies E-Book

Tasso Politis

• Herausgeber: GRIN Verlag
• Sprache: Englisch

Veröffentlichungsjahr: 2011

Beschreibung

Bachelor Thesis from the year 2011 in the subject Business economics - Investment and Finance, University of Applied Sciences Essen, language: English, abstract: This study aims to integrate itself into the scientific network of business administration by covering the topic of dividend strategies. Its main objective is to give a theoretical overview on the field of dividend orientated investment strategies under consideration of current scientific literature and research results. Additionally, a practical part is included as the study also applies the theoretical findings empirically by examining a possible outperformance of investment strategies on the German stock market. Chapter 2 creates the basis as it explains the differences between passive and active portfolio management under consideration of the market efficiency hypothesis. As the active management style contains several different approaches, it is divided in three main categories that are linked to different stages of market efficiency. Due to the fact that dividend strategies aim to outperform the market, they are assigned to semi-active and active portfolio strategies. To get informed about different possibilities of measuring this outperformance, the chapter finishes with a presentation of performance analysis concepts that complement each other. Chapter 3 goes more into details of dividend strategies as it divides them into two basic categories. As the active ones are partly complex and require the estimation of a company’s future growth rate, they are preferably used by institutional investors. In contrast to that, the semi-active dividend strategies can be easily applied also by individual investors as they are linked to objective and clearly defined actual figures. Moreover, a large number of investment opportunities have been developed and issued in the last years that make it easy to follow those dividend strategies. To get an overview on the state of research, several empirical studies concerning the success of dividend strategies on different markets are presented. The last chapter 4 contains an empirical study on the German stock market, which examines the advantageousness of the DivDAX in comparison to the DAX over a time frame of 11 years. After an interpretation of the results, combined with an outlook on possible future research questions, a general conclusion of the theoretical and practical part is made in chapter 5.

Leseprobe

Table of Content

1 Introduction. - 1 -

1.1 Problem definition - 1 -

1.2 Scope of work - 2 -

2 Theoretical basis of portfolio management - 3 -

2.1 Passive portfolio management. - 3 -

2.1.1 Definition and process. - 3 -

2.1.2 Tracking methods. - 4 -

2.1.3 Market efficiency hypothesis - 12 -

2.2 Active portfolio management. - 17 -

2.2.1 Visual approach. - 18 -

2.2.2 Quantitative approach - 19 -

2.2.3 Qualitative approach - 21 -

2.2.4 Active performance analysis - 24 -

3 Systematisation of dividend strategies - 30 -

3.1 Active dividend strategies - 30 -

3.1.1 Basics of the Dividend Discount Model - 31 -

3.1.2 Single-stage Dividend Discount Models - 32 -

3.1.3 Multi-stage Dividend Discount Models - 35 -

3.2 Semi-active dividend strategies - 38 -

3.2.1 Dow Dividend Strategy. - 38 -

3.2.2 Top-10 / Low-5 Strategy. - 41 -

4 Empirical study on the DivDAX - 43 -

4.1 Concept of the DivDAX - 43 -

4.2 Purpose and examination design - 46 -

4.2.1 Formulation of hypotheses - 46 -

4.2.2 Data selection and methodology - 47 -

4.3 Results of data analysis - 48 -

4.3.2 Hypothesis 2. - 50 -

4.4 Interpretation of results - 55 -

5. Conclusion - 57 -

5.1 Achievement of objectives - 57 -

5.2 Outlook and perspectives. - 59 -

Appendix 1: Composition of the DivDAX from 2005 to 2010 - 61 -

Page 1

FOM Hochschule für Oekonomie & Management Essen

Bachelor thesis in the course of study Bachelor of Arts in International Management

Outperformance through dividend strategies

Author: Tasso Politis

Munich, February 15, 2011

Page 4

List of abbreviations

ADL: Advanced Decline Line AG: Aktiengesellschaft ARIMA: Autoregressive Integrated Moving Average CAPM: Capital Asset Pricing Model DAFOX: Deutscher Aktien Forschungs Index DAX: Deutscher Aktienindex DDM: Dividend Discount Model DDS: Dow Dividend Strategy df: Degree of freedom DivDAX: Dividend DAX DJIA: Dow Jones Industrial Average Index EPS: Earnings per share ETF: Exchange Traded Fund EUREX: European Exchange GARCH: Generalized Autoregressive Conditional Heteroskedasticity GmbH: Gesellschaft mit beschränkter Haftung InvG: Investment Gesetz ISIN: International Securities Identification Number KGaA: Kommanditgesellschaft auf Aktien LPM: Lower Partial Moments MDAX: Mid cap DAX MSCI: Morgan Stanley Capital International pp: Percentage points S&P: Standard & Poor’s SE: Societas Europaea Sig.: Significance TecDAX: Technology DAX XETRA: Exchange Electronic Trading

Page 5

Page 1

1 Introduction

1.1 Problem definition

During the previous years, investors have shown that they are willing to take on

a high level of risk to gain above average profits. Especially since the beginning

of the financial crisis in 2007, both institutional and individual investors have

tried to extend their investment horizon and develop new strategies to escape from the general decline on nearly all mature markets. Despite all the quantitative oriented and complex methods, dividend strategies have reached new popularity as they can be applied easily and are meant to enable investors to outperform the market. Due to the fact that companies on the German stock market increase their yearly dividend payments and have a high dividend yield on average in comparison to previous periods, the dividend factor becomes

1Further more, the currently low level of more and more important for investors.

interest rates leads to an increasing attractiveness of dividend stocks as they partly offer a dividend yield of more than 7,00% per year.

Empirical studies on several markets all over the world have shown that dividend strategies are able to outperform their particular benchmark on a long term perspective. Thereby, different types of strategies were applied as there are various concepts of dividend orientated investment approaches. Thus, the empirical results are not comparable in each case. Further more, only few studies were published that consider the German market, e. g. Kotkamp and Otte (2001) and Henne et al. (2009). As the former does not consider the market reactions due to the technology bubble and financial crisis and the latter uses a self developed dividend strategy, a current study is necessary that analyzes a possible advantageousness of an objective and traceable dividend strategy approach on the German stock market.

1Cp. Sommer, U. (2010), p. 23.

Page 2

1.2 Scope of work

This study aims to integrate itself into the scientific network of business administration by covering the topic of dividend strategies. Its main objective is to give a theoretical overview on the field of dividend orientated investment strategies under consideration of current scientific literature and research results. Additionally, a practical part is included as the study also applies the theoretical findings empirically by examining a possible outperformance of investment strategies on the German stock market.

Chapter 2 creates the basis as it explains the differences between passive and active portfolio management under consideration of the market efficiency hypothesis. As the active management style contains several different approaches, it is divided in three main categories that are linked to different stages of market efficiency. Due to the fact that dividend strategies aim to outperform the market, they are assigned to semi-active and active portfolio strategies. To get informed about different possibilities of measuring this outperformance, the chapter finishes with a presentation of performance analysis concepts that complement each other. Chapter 3 goes more into details of dividend strategies as it divides them into two basic categories. As the active ones are partly complex and require the estimation of a company’s future growth rate, they are preferably used by institutional investors. In contrast to that, the semi-active dividend strategies can be easily applied also by individual investors as they are linked to objective and clearly defined actual figures. Moreover, a large number of investment opportunities have been developed and issued in the last years that make it easy to follow those dividend strategies. To get an overview on the state of research, several empirical studies concerning the success of dividend strategies on different markets are presented. The last chapter 4 contains an empirical study on the German stock market, which examines the advantageousness of the DivDAX in comparison to the DAX over a time frame of 11 years. After an interpretation of the results, combined with an outlook on possible future research questions, a general conclusion of the theoretical and practical part is made in chapter 5.

Page 3

2 Theoretical basis of portfolio management

2.1 Passive portfolio management

2.1.1 Definition and process

Passive portfolio management, also called index tracking or indexing, is a strategy that aims to emulate a specific index portfolio in order to equal the

2It is based on the general return of investment and hold it in line with the index.

assumption of information efficiency and therefore includes that it is not possible to generate outperformance through active asset management due to the fact3Especially since the that all existing information is reflected in a certain asset. beginning of the financial crisis in 2007, passively managed funds have become more attractive and got enhanced public attention from investors´ side due to the fact that funds with an active management style belied their expectations4The decision to regarding their possibilities to avoid losses in bear markets. follow a passive portfolio management style may be based on several reasons, such as the unavailability of information resources, what makes an active strategy impossible, for example for private investors with a focus on emerging5Further more, a passive strategy is advantageous if the process of markets.

stock picking creates transaction costs that compensate the possible relative6The “paradox of outperformance of an active portfolio management. investment philosophy” combines the return oriented perspective with risk aspects and concludes that passive portfolio management has mainly three

7advantages in comparison to an active style that seem to be contradictory. Passive portfolio management creates lower transaction costs, it has a minimal relative risk and due to empirical studies, the return of passively managed funds is higher than 75% of the active ones. In contrary, actively managed portfolios are more cost intensive and fraught with higher risk within the meaning of the

2Cp. Leser, H., Rudolf, M. (2003), p. 35.

3Cp. Fama, E. (1991), p. 1575.

4Cp. Krink, T., Mittnik, S., Paterlini, S. (2009), p. 172.

5Cp. Bruns, C., Meyer-Bullerdiek, F. (2008), p. 108.

6Cp. Poddig, T., Brinkmann, U., Seiler, K. (2005), p. 245.

7Bruns, C., Meyer-Bullerdiek, F. (2008), p. 108.

Page 4

Tracking dependency of active and passive portfolio management, called the “information8It describes the fact that even if the passive portfolio management is paradox”.

theoretically and empirically predominant to active asset management, it loses its advantage when all investors act rationally and prefer the passive strategy. In this case, no one processes information from the capital markets and active9portfolio management becomes efficient and economically reasonable again.

2.1.2 Tracking methods

The primary aim of the passive portfolio management is to replicate a certain

10The target portfolio as precisely as possible with the lowest possible cost. most obvious approach to target an index is the full replication, in which “each in the target portfolio included assets are admitted to the tracking portfolio with the11This method may be effective in terms of having the lowest appropriate score”.

Tracking Error, but it implicates the problems of high transaction costs. Additionally, legal constraints make the implementation of this approach problematically, especially for mutual funds. To name an example, German investment companies cannot allocate more than 5% of their fund assets in

12securities of the same debtor or 10% maximum if this is contractually agreed. This would make a full replication of the DAX currently impossible, because stocks from the SIEMENS AG are currently weighted with more than 10% in this13Further more, due to the fact that stocks are not divisibly, a very high index.

amount of stocks and therefore a large amount of money would be needed to14The high reach the exact weight of each position of the target portfolio. number of stocks would also complicate the process of controlling and adjusting the tracking portfolio over a certain period of time. Thus, the full replication of a

8Cp. Lahusen, R., Müllers, J. (2003), p. 42.

9Cp. Fama, E. (1970), p. 387.

10Cp. Bruns, C., Meyer-Bullerdiek, F. (2008), p. 110.

11Poddig, T., Brinkmann, U., Seiler, K. (2005), p. 248.

12Cp. InvG (2010), §60 I.

13Cp. Deutsche Börse AG (2011a).

14Cp. Poddig, T., Brinkmann, U., Seiler, K. (2005), p. 246.

Page 5

target approaches may reach the aim of a low tracking error with low cost better.

All methods which implicate to hold a certain part of the assets in an index rather than fully replicate it are classified as sampling methods or approximative methods. The largest holdings approach is the simplest one of them and describes the procedure to select only the largest companies out of an index and weight them after a common feature such as market capitalization or index15As an example, the 164 highest capitalization stocks out of the weighting.

1660 different values including MSCI WORLD Index are responsible for 50% of the whole capitalization and the largest 660 companies and about 36% account

16According to the fact that the return of an for 80% of the total capitalization.