Dividend Yield: Traps, Facts and Fixes

The value of an investment is measured in terms of the cash flow that it generates. In the case of equity, shareholders traditionally participate in the company’s cash flow by receiving dividends (DVD). Therefore, dividends act as a proxy for cash flow generation and are an important indicator of profitability. The dividend yield, which is the ratio of dividends to the price paid, is often used as an indicator of how expensive a company is, respectively how much an investor has to pay for a stream of dividends.

Dividends have long been, and continue to be, a key indicator for many investors when making investment decisions. Historically, and to a lesser extent in the present day, the comparison of dividend yield and coupon rate is often taken as a criterion in the Equity/Bond allocation investment decision. As commented by Aswath Damodaran [1] in his blog, in the early years of the equity market in the late 1800s, companies wooed investors who were accustomed to investing in bonds with fixed coupons by offering them predictable dividends as an alternative.

Paying dividends has become a standard practice and companies are reluctant to ever cut dividends. The graph below taken from Damodaran’s blog documents that reluctance by showing that less than 10% of US companies reduce DVD, on average.

Dividend and valuation

The first equity valuation model and investment selection criteria were dividend-based. John Burr Williams, a legendary investor of the 1920s and 1930s, formulated the importance of dividends in his 1938 book, The Theory of Investment Value. His ideas were later reframed by Myron Gordon and Eli Shapiro in the dividend discount model or Gordon growth model published in 1956[2]. In the 1980s, dividends continued to attract the attention of academics and researchers trying to figure out why they are such important information for investors, shareholders and managers. The dividend signaling theory focused on the information conveyed by dividend decisions about the cash flows that shareholders can expect to receive[3]. Dividends are a signal to shareholders and cutting them thus represents bad news for the stock price[4].

Bird in the hand preference

Dividends tend to be paid by mature companies with limited growth opportunities whose cash flow cannot be reinvested profitably, so it is returned to shareholders — definitely a wise management choice. The typical profile of a high DVD yield company is very appealing to many investors: mature; relatively stable cash flow; strong visibility and brand; less risky than the market. These types of companies, so-called ‘cash cows’, do not tend to engage in high-risk investments and are not exposed to innovation and technology driven competition. Instead, they provide peace of mind and are a source of recurrent income for their shareholders. Rather than capital gains placed in an uncertain future (some) investors prefer receiving a flow of dividend payments. For those investors a bird in the hand is worth two in the bush.

Dividend and value

However, despite the attention that investors continue to give to it, and even if pricing models have been developed based on dividends, economic theory is very clear about the relevance of dividends when it comes to the value driver of a company: DVDs play no role. In fact, if we exclude the distorting effect of “frictions” (like taxes or costly, limited access to the market), then dividends, as well as financing decisions in general, have no impact on the value of a company. This is the famous Dividend Irrelevance Theorem, formulated in 1961 by two iconic professors of Finance, Nobel laureates, Modigliani and Miller (MM)[5] stating that, in a world without frictions, the value of a company does not depend on dividend decision. We all know what happens when a company, ETF or a mutual fund pays a DVD: the value of the company, of the fund or the investment vehicle in general goes down exactly by the same amount. You can’t have your cake and eat it too. There is no value creation out of paying dividend.

Dividend yield traps

Many companies do not pay dividends, yet their value is in the billions. Consider all the venture growth stocks, such as biotechnology companies. Not all companies pay dividends, and those that do, do so with varying intensity. Certain sectors tend to pay systematically higher others lower dividends than the market average. It follows that by preferring high-dividend stocks, investors reduce the range of investment opportunities available to them. Even worse they might be caught into a DVD yield trap. Since a reduction or suppression of DVD payments is hardly ever accepted by investors, even companies that are making a loss pay a dividend, as reported in the following table published by Aswath Damodaran on his blog. In his analysis, he has segmented the world equity market according to sectors, differentiating between money-making and money-losing companies and showing the respective aggregated dividend payments of each group.

The sectors of energy, real estate, utilities, materials and financials tend to have the highest dividend yield (last column). It is also interesting to note that companies in all sectors pay a DVD even if they are making a loss (see “% Dividend Payers” column), funded most likely with debt or by selling assets. Paradoxically, keeping the DVD constant even when the company is making a loss might result in an increase in the DVD yield, since the company’s equity price might decline due to deteriorating operating results.

Investment advice

One well-known and widely used valuation model is based on the DVD as a proxy for company cash flow. However, DVD itself is not a driver of company value but rather a signal of how much of that value shareholders can expect to receive in cash (instead of capitalizing price increases). This is clearly relevant for investors who prioritise income and choose high-dividend yield investments. Below are listed some implications investors have to be aware of and concrete investment fixes to address the (high) DVD yield traps.

• For investors with preference for income, the above simple analysis highlights important aspects to be considered when building an high DVD yield strategy. Apart from DVD they need to assess whether and to what extent companies are profitable, not only now, but also in the coming years, ie how sustainable dividend payments in the future are. They need to establish whether DVDs are being paid out of rising debt levels or simply because the company is selling its ‘silver plate’ assets. DVDs can therefore play a role and are a powerful indicator, but in an investment selection model they need to be combined with complementary indicators that address profitability, growth, historical DVD patterns and balance sheet safety. The goal is to build a portfolio by selecting companies with the desired high DVD profile, while avoiding the high DVD yield trap.
• Investors have to be aware that even an articulated DVD yield strategy, with checks and balance, relative and absolute risk control, can incur in prolonged period of underperformance vs the market. In fact, by prioritizing the DVD criteria the title selection ends up being restrictive, by de facto excluding growth stocks (particularly young ones), stocks operating in sectors characterized by high profitability, high valuation, and high investments hence lower payout and DVD. All this implies a substantial deviation from the benchmark and the acceptance of prolonged phase of underperformance.
• Over the last decades companies have increased the proportion of net income destined to share buybacks, which is an indirect way of returning cash flow to shareholders. This has induced many investors to prefer shareholder yield (which combines DVD and buybacks) to dividend yield as selection criteria. Shareholder yield criteria is less restrictive in the stock selection than dividend yield, but it has a lower income generation.
• To generate income a simple solution consists in adopting a wide diversified investment strategy (including also high profitability and growth stocks for example) and generating income by selling part the portfolio. Alternatively, he/she can invest in a fund that regularly distributes the income (dividend and interest) generated by its investments as well as special (tax free) payment out of realized capital gains. Interestingly this practice is not so common among fund management companies.

Carmine Orlacchio, 14.10.2025

[1]Musings on Markets: Data Update 9 for 2025: Dividends and Buybacks – Inertia and Me-tooism!

[2] Gordon, M.J and Eli Shapiro (1956) “Capital Equipment Analysis: The Required Rate of Profit,” Management Science, 3, October 1956, pp. 102-110.

[3] Bhattacharya, Sudipto, 1979, Imperfect information, dividend policy, and the bird in the hand

fallacy, Bell Journal of Economics and Management Science 10, 259-270.

[4] In an article published in Finanz und Wirtschaft on 13^th September entitled ‘Nestlé wackelt, aber fällt nicht’, it is argued that the increasing leverage is a consequence of keeping the DVD payment constant, as reducing it for a dividend aristocrat like Nestlé would send out a fatal signal. Following a staggering 35% decline over three years, it is questionable whether the market would be “surprised” by a DVD reduction. It is more likely that the fatal signal has to do with equity holders being favored at the expense of bondholders as long as DVDs are paid.

[5]Miller, Merton H., and Franco Modigliani. “Dividend Policy, Growth, and the Valuation of Shares.” The Journal of Business, vol. 34, no. 4, 1961, pp. 411–33

Building Our State-of-the-Art Quant Infrastructure

This month marks QuantArea’s second anniversary, a moment to reflect on our engineering and methodological journey. Originally designed to combine economic expertise with advanced technology, our Portfolio Design Platform has evolved into a comprehensive system for systematic research and rigorous backtesting. Key highlights include:

🧠 Proprietary Methodology and Signals

We have built a proprietary factor and alpha signal library, since off-the-shelf solutions often lack the economic depth and analytical resolution our clients demand. Integrated with our custom backtesting and analytics platform, it enables signal evaluation across diverse markets under realistic trading assumptions. Together with client-specific constraints and scenarios, these are fed into our portfolio optimization engine and transformed into an implementable strategy.

📊 Data and Bloomberg

We collaborate closely with Bloomberg to ensure seamless data integration. Through the BQNT-Enterprise platform, we gain full access to Bloomberg’s extensive data universe, enabling us to leverage data fields with near-limitless flexibility and real-time responsiveness in the construction of our strategies. This seamless integration removes many data-related challenges and accelerates the transition from exploration to deployment-ready investment strategies.

⚙️ Modern Architecture

Our containerized, cloud-native and modular framework enables scalable and flexible deployment across environments. Individual components can be run and tested independently or in combination. Both the research and production environments rely on a unified codebase, ensuring seamless strategy implementation.

This translates into full flexibility. Client-specific requirements can be systematically tested and implemented across multiple investment universes. Your investment philosophy is reflected in the strategies and ensures that factor exposures, risk profiles, and return metrics are precisely aligned with your goals.

Portfolio Construction by QuantArea for the Winvest Swiss Equity Fund

In December 2024, WINVEST ASSET MANAGEMENT AG launched its first fund. As the investment advisor, QuantArea is responsible for portfolio construction and provides updated model weights for the fund on a quarterly basis. The result: a systematic ivnestment process, rapid time-to-market, and  clear outperformance compared to the benchmark (SPI) and peer group.

Below, Stefan Rammelmeyer (CEO, WINVEST ASSET MANAGEMENT AG) and Marcel Masshardt (CEO, QuantArea AG) share their impressions and experiences from their collaboration to date.

WINVEST has chosen QuantArea as its partner for the newly launched smartF® Equity Switzerland Enhanced Fund. What was the origin of this collaboration?

Stefan Rammelmeyer: When I joined WINVEST, it was clear that we wanted to make our investment process more systematic, robust and scalable without compromising on our values, such as customer focus and transparency. To achieve this, we needed a strong technology partner who understood our philosophy. This is why we entrusted QuantArea with the portfolio construction mandate.

Marcel Masshardt: We asked ourselves: How can we make our portfolio construction expertise available to asset managers in a flexible, efficient and pragmatic way? The idea for ‘Quant-as-a-Service’ was born. In WINVEST, we found a team open to developing something new with us. From the outset, our relationship was not that of a classic client-service provider, but a partnership.

What exactly is Quant-as-a-Service?

Marcel: Essentially, we provide our clients with access to comprehensive infrastructure and quantitative expertise, including data preparation, factor calculations, portfolio optimization and risk analysis, so they don’t have to develop all of this internally themselves. Distribution, on the other hand, is managed solely by WINVEST ASSET MANAGEMENT AG, with no involvement on our part.

Stefan: For us, this means that we can implement a systematic investment strategy based on comprehensive fundamental and market data—while remaining lean and efficient. Our strengths lie in customer contact, trading, and monitoring. We work with QuantArea on everything that is highly data-driven. This division of labor makes us faster, more flexible—and ultimately better.

smartF®: What’s behind this concept?

Stefan: Our smartF® investment concept is systematic, forecast-free and data-driven. Using objective key figures and systematic portfolio optimization, we create a focused portfolio with compelling characteristics. Our goal is to avoid emotional decision-making and achieve an optimal risk/return ratio. To this end, we focus on profitable companies with solid balance sheets that are attractively valued.

Marcel: In addition to the characteristics mentioned by Stefan, the model controls for unwanted factor tilts, such as potential negative momentum exposure. It also optimises diversification by estimating the covariance matrix.smartF® demonstrates how modern asset management can work: better solutions at lower costs by splitting up the value chain and involving specialists. The smartF® model was developed exclusively for WINVEST ASSET MANAGEMENT AG. In the context of other mandates, we also calculate additional Swiss equity models. Each model has its own distinct characteristics and is tailored to meet the specific needs of individual clients.

What has happened in recent months – and what comes next?

Stefan: It is impressive to see how much smartF® has helped us to advance strategically. With our first fund (Swiss equities), we were able to strengthen our position as an asset manager, streamline our processes and attract new clients. Consequently, we now count various pension funds among our clients. The fund’s performance has also been impressive, confirming the strong results of long-term backtesting. Since the beginning of 2025, the fund has achieved an excess return of around 5% compared to the Swiss Performance Index (as of 31 July 2025), and it is also ahead of almost all the peer funds we are aware of. We plan to launch the next fund, based on the same smartF® investment concept, for the European equities ex-Switzerland universe before the end of the year.

Marcel: For us, working with WINVEST meant entering the market in December 2024. We now also count banks and insurance companies among our Quant-as-a-Service customers. Within the framework of a mandate, we value working together as equals with shared goals. Thank you, Stefan! We look forward to continuing our collaboration with the WINVEST team.

In case of emergency activate the factors control!

The once-in-a-lifetime change in the USA’s political and economic doctrine has left investors quite puzzled. In an uncertain world, it is even more relevant to structure your portfolio using all the levers of diversification, including the usually neglected factors control.

The USA administration’s tentative, unconventional measures combined with uninspiring communication have led investors to question the US financial market exceptionalism. Investors with substantial exposure to the US equity market should ask if proper risk management requires a more balanced allocation to the US dollar, as well as to the US equity and debt markets. These are the three most liquid markets when it comes to currency, bonds, and equities. This means also that, no matter how involved you are in US investments, what happens in the US will impact the entire financial market via secondary effects on the liquidity of the entire financial system. Witnessing a once in a lifetime change of political and economic doctrine, investors face higher degree of uncertainty. Accordingly they need to strive for the maximum degree of diversification out of their strategic investment process.

Let s look at equity investments: the US equity market represents about 70% of the developed public markets and 65% of the all-country public market, as measured by the MSCI index. The US equity index is characterized by strong concentration in certain sectors and individual stocks. The US equity index is trading at historically high multiples, and comparisons with other markets reveal substantial gaps between valuation multiples. High level of debt, trade and budget deficit weigh on the USD. Given the fiscal, political, social, and geopolitical situation, the degree of fragility is quite high.

A relatively easy way to diversify is allocating geographically and by sector. Moving a step ahead and striving for more effective diversification, investors should actively address the fundamental characteristics of the investments, namely the factors and style profile. The latter is a less directly readable characteristic of a portfolio. Building balanced equity strategies requires control and active positioning with respect to the underlying characteristics of the portfolio, the factors like Value, Profitability, Low Vola, Growth, Size etc…. Addressing this issue is an important feature for stabilizing the portfolio across different market scenarios and is quite helpful for all active strategies that go beyond mechanical market cap benchmark replication.

If you invest by replicating a benchmark, you accept country, sector and single stock concentration risk. At the same time blindly and unknowingly you are taking factors exposure, which might not necessarily be a balanced one. You can enhance the level of diversification by addressing concentration (including factors) risks with small increase in tracking error. Alternatively, you can adopt a more balanced benchmark and monitor and measure performance against it.

In an uncertain world it is even more relevant to structure portfolios using all the levers of diversification. Proper diversification requires going beyond the allocation dimension, such as nominal exposure toward standard asset classes. It is also important to look into and select and control the desired underlying drivers of performance, derived from fundamentals and or price dynamics.

At QuantArea together with our clients we design the investment solution by addressing the allocation decision and selecting a deliberate position with respect to the portfolio fundamental drivers. Thanks to an active positioning and control on the targeted (desired) and non targeted (residual) factors, the improvement in the risk and performance measures is quite sensible.

Carmine Orlacchio, 18.06.2025

Questioning U.S. Exceptionalism in Your Investment Portfolio

For more than 100 years, the United States has represented more than just a powerful economy. It has stood as a symbol of liberal democracy, the “shining city on a hill”, fueled by manifest destiny, and a deep-seated aversion to authoritarianism. After all, the nation was born from a rebellion against monarchy, namely King George III’s taxes and heavy-handed rule over the colonies sparked a revolution rooted in the ideals of liberty, representation, and individual sovereignty.

That anti-monarchist spirit wasn’t just historical, it became part of the American DNA. Rule of law, checks and balances, separation of powers, these weren’t just political values, they were economic ones too. They underpinned the trust, resilience, and relative stability that made the U.S. a magnet for capital for generations.

But today, that narrative feels… complicated.

In a move without precedent in U.S. peacetime history, President Donald Trump with his abstruse tariffs Executive Order has operated with the posture and authority of a monarch, circumventing the Congress and institutional guardrails. Has America finally crowned Donald I?

The political implications for post-World War II order are huge. For investors, it’s a signal to pause and reassess.

Passive equity world strategies carry 70% exposure to U.S. markets and the U.S. dollar. This heavy tilt has often been rationalized by superior innovation, stronger corporate governance, robust financial infrastructure, and the country’s global economic dominance.

But in a world where the democratic underpinnings of the U.S. are showing stress cracks, it’s fair to ask:

• Is that level of exposure still adequate?
• Are U.S. valuations (consistently higher than their global counterparts) still justified by fundamentals?
• Without knowing and anticipating how all this will develop, is the risk of your equity portfolio truly balanced and diversified?

If investors feel uncomfortable with just replicating an index, we at QuantArea can design a bespoken portfolio.

Let’s start that conversation, because the future might not look like the past.

Carmine Orlacchio, 11.04.2025

QuantArea AG at the Center for Innovation and Digitalization since September 2023

In September 2023, we moved into our office in the Center for Innovation and Digitalization (ZID). The ZID sees itself as a community for entrepreneurs in the Bern region and offers an inspiring environment with a wide variety of companies under one roof. The ZID is part of the Bernapark site, the former Deisswil cardboard factory, which is already home to over 150 companies.

We would like to thank the entire ZID team for the great working environment and first-class service.

We look forward to your visit to the ZID. Information on how to contact us and how to get here can be found here.