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In this scenario, we believe that low beta stocks with high dividend yields (defensive stocks) are the best option to invest in at this time to support overall portfolio gains.
In this scenario, investors would be well advised not to be too disillusioned but to continue investing in stocks exhibiting low volatility, reasonable valuations, and higher than market dividend yields.
These results indicate that the monthly data show time-series return variations that are related to dividend yield.
As noted earlier, Brennan's (1970) capital asset-pricing model states that a security's pretax return is linearly and positively related to its systematic risk and its expected dividend yield.
They then calculated the dividend yield coefficient for each of the yield groups.
The excess return is not related to the dividend yield.
When we replicate the Litzenberger and Ramaswamy experiment with these betas, we still find a dividend yield coefficient that is very close in magnitude to what has been reported in Litzenberger and Ramaswamy (1979).
Our empirical evidence indicates that both studies do not find cross-sectional return variations, that is, the long run risk-adjusted returns are not correlated with dividend yield.
We examined at length the potential effects of various definitions of the expected dividend yield on a Litzenberger and Ramaswamy experiment.
The classification can be important when the dividend yield has to be estimated; that is, when the ex-day and the announcement occur during the same return interval.
Brennan's (1970) model of these tax effects indicates that risk-adjusted pretax returns should be positively correlated to dividend yields.
When we move to longer interval (a year), we do not find a significant relation between dividend yields and returns.