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Principles of Formation of the Dividend Portfolios on the Russian Stock Market

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Good morning, dear everyone!

Today I’m going to tell you about the Principles of Formation of the Dividend Portfolios on the Russian Stock Market.

Background

One of the most famous strategies is the Dogs of the Dow strategy which was invented by Michael O’Higgins in 1991 and became extremely popular during the next 20 years. The majority of the researchers who have tried to prove the efficiency of the DoDs investment strategy managed to confirm the hypothesis that it is possible to outperform the market by using the dividend strategy. Although nowadays the number of similar researches all around the world exceeds 100 papers, there is the lack of studies conducted on the Russian stock market. Thus, it seems to be important and relevant to make a research, which provides the investigation of the Dogs of the Dow strategy and suggests a new type of the passive investment strategy for Russian investors.

Delimitations of the study

During the survey a few problems are expected to be solved. First of all, the main aim is to understand whether using the Dogs of the Dow strategy can enable the investor to beat the market. Furthermore, by implementation of the two additional parameters (the number of stocks in the portfolio and the holding period), it is possible to estimate what number of shares and which month for the portfolio rebalancing should be chosen. Moreover, it is possible to add to the model some filters such as P/E multiple and ROA coefficient in order to obtain more accurate results.

Professional significance

This research seems to be rather innovative and meaningful because this type of strategy is a new instrument for the investors on the Russian stock market, which has already demonstrated the high level of efficiency in different countries.  Moreover, this study can become a guide for action to the ordinary investor how to outperform the market by using passive investment strategy.

Now I’m going to tell you about the dataset and methodology of my investigation. I was necessary for me to obtain the following information:

  • Yearly dividend yield of Russian companies (Thomson Reuters)
  • Monthly data about the performance of MICEX and stock prices of all the Russian companies listed on the Moscow Stock Exchange (Finam)
  • ROA and P/E coefficients of Russian companies (Bloomberg, Thomson)
  • The number of transactions with shares (liquidity) (www.Investfunds.ru)

For this research I chose the time period from January 2001 to December 2016.

The classical version of the DoDs strategy was changed by:

  • The implementation of two parameters: the number of stocks in the portfolio (1,3,5,7,10) and months for the portfolio rebalancing (from July to December)
  • Dividing all the companies into 2 groups: high/low level of liquidity
  • Adding two filters such as P/E multiple and ROA coefficient

1. It is expected that the return on the dividend strategy would exceed the return on the market index (MICEX)

2. The optimal values for the number of stocks in the portfolio and the month of the portfolio rebalancing are expected to be identified

3. Whether inclusion of the filters improves the results or not

Methodology. The investigation was conducted as follows:

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