A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

The Dividend Jackpot Approach
This technique for outguessing the market rests on the
logical assumption that if stocks in general are providing
above-average dividend yields, then the total future returns
investors receive will be relatively generous. Two academic
studies—one by Eugene Fama and Kenneth French and the
other by John Campbell and Robert Shiller—concluded that
one can indeed hit the jackpot with such an approach,
thereby negating the randomness of the market. Depending on
the forecast horizon involved, as much as 40 percent of the
variability in future market returns can be predicted on the
basis of the initial dividend yield of the market as a whole.
An interesting way of presenting the results is shown in
the diagram below. The diagram was produced by measuring
the dividend yield of the broad U.S. stock market each quarter
since 1926 and then calculating the market’s subsequent ten-
year total return through 2009. The observations were then

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divided into deciles depending upon the level of the initial
dividend yield. In general, the exhibit shows that investors
have earned higher total rates of return from the stock market
when the initial dividend yield of the market portfolio was
relatively high, and relatively low future rates of return when
stocks were purchased at low dividend yields.
These findings are not necessarily inconsistent with
efficiency. Dividend yields of stocks tend to be high when
interest rates are high, and they tend to be low when interest
rates are low. Consequently, the ability of initial yields to
predict returns may simply reflect the adjustment of the
stock market to general economic conditions. Moreover, the
dividend behavior of U.S. corporations may have changed
over time. Companies in the twenty-first century may be
more likely to institute a share repurchase program than to
increase their dividends. Thus, dividend yield may not be as
meaningful as in the past. Further, it is worth pointing out
that dividend yields were unusually low and the stock market
appeared irrationally exuberant at the start of 1995, when the
Dow Jones Industrial Average was selling at the 5,000 level.
The Dow went on to peak near 11,000. Finally, note that this
phenomenon does not work consistently with individual

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stocks. Investors who simply purchase a portfolio of
individual stocks with the highest dividend yields in the
market will not earn a particularly high rate of return.