Historically, the percentage of dividend payers in Brazil has ranged between 71% and 87%, making it a propitious environment for implementing dividend-focused strategies. The highest-yielding stocks in high-yield strategies often come with greater portfolio volatility, and Brazil is no exception. This blog explores the rationale behind the implementation of a low volatility high dividend strategy in Brazil and its potential benefit.
Low volatility high dividend strategies aim to provide yield at a reasonable risk level. To review the characteristics of high dividend yield stocks in Brazil, we separated dividend payers from the S&P Brazil BMI universe into hypothetical quintiles based on yield. Securities in each quintile are equal weighted and held for 12 months. Our results showed that the securities in Quintile 1 (the highest dividend yielding stocks) had the highest average 12-month holding period returns (see Exhibit 1).
Then, we went through the same exercise but based the quintiles on their 12-month trailing volatility. As shown in Exhibit 2, securities with lower volatility (Quintiles 1 and 2) had higher risk-adjusted returns (0.56 and 0.55, respectively) while securities in the higher volatile buckets (Quintiles 3, 4, and 5) had much lower risk-adjusted returns (0.28, 0.34, and 0.24, respectively).
Our approach to combine high yield with low volatility consisted of two steps. First, we selected the top 50% of stocks with the highest dividend yield; second, from that subset, we selected the top 40% with the lowest volatility stocks.
To demonstrate the possible benefits of our approach, we created three hypothetical portfolios based on the dividend payers of the S&P Brazil BMI and measured their historical returns from Dec. 31, 2007, to June 28, 2019.
- High Yield portfolio: 50% of stocks with the highest dividend yield of the dividend payers of S&P Brazil BMI.
- Low Volatility High Yield portfolio: 40% of the lowest volatility stocks selected from the High Yield portfolio.
- High Volatility High Yield portfolio: 60% of the highest volatility stocks from the High Yield portfolio.
All portfolios were rebalanced in June and December, and all portfolio members were equally weighted.
The results show that over the mid- and long-term periods, the Low Volatility High Yield portfolio outperformed the High Yield and High Volatility High Yield portfolios with less risk, delivering better risk-adjusted returns (see Exhibit 3).
To review how these hypothetical portfolios performed in the most significant down markets, we looked at the three largest drawdowns of the S&P Brazil BMI since Dec. 28, 2007. In all the drawdown periods, the Low Volatility High Yield portfolio outperformed the benchmark and High Yield and High Volatility High Yield portfolios (see Exhibit 4).
Combining low volatility and high dividend yield strategies by using a two-step screening process when constructing a high dividend index could potentially provide better risk-adjusted returns than a high yield strategy, capturing the benefits of high dividend and low volatility strategies.
 Luk, Priscila and Qu, Xiaoya, “The Beauty of Simplicity: The S&P 500® Low Volatility High Dividend Index,” 2019, S&P Dow Jones Indices LLC.