Dividend Opportunity Index: An Opportunity for Small Investors

Abstract

This paper examines whether high dividend stocks portfolio (represented by CNX dividend opportunity index of NSE) outperforms blue chip stocks portfolios and market portfolio in Indian stock market, using absolute rate of return as well as risk adjusted measures viz Sharpe ratio and Treynor ratio, Jensen ratio and the CAPM. Over the period 1st Oct 2007 to 30th June 2012, we find that high dividend stocks portfolios has outperformed the market portfolio whereas blue chip stocks portfolio underperformed the market portfolio. These results are consistent with the popular “Dogs of Dow Strategy”. Moreover, high dividend stocks portfolio is found to have also lower systematic risk as well as total risk ,than the market portfolio whereas blue chip stocks portfolio has higher systematic risk as well as total risk than that of the market portfolio. High dividend stock portfolio has shown lower total risk per unit of average return. Regression results shows that high dividend stocks portfolio has provided statistically significant abnormal return whereas blue chip stocks portfolio has provided abnormal losses. The finding that high dividend stocks portfolios outperform blue chip stocks portfolio despite of having lower risk implies that most of the high dividend stocks are undervalued while blue chip stocks are overvalued in Indian market. Hence there is mispricing contributing towards market inefficiency. The research findings have important implications for small and retail investors seeking for regular income as compare to future capital gains. Such investors can be benefited by investing in the high dividend stocks portfolio.

Keywords: Dividend yield, Indian Stock Market, Dividend opportunity index, Value stocks, Dogs of the Dow strategy, Sharpe ratio, Treynor ratio, Jensen ratio, Performance Evaluation

JEL Classification: G11, G35