LOW-RISK INVESTING: THE INTERACTION OF BETA AND YIELD STRATEGIES

Abstract

Low-beta stocks and high-yield stocks have independently been shown to deliver abnormal risk-adjusted returns. Motivated by these studies and the growing literature on low-risk investing, we explore the interaction of the beta and dividend yield effects. We also examine the performance of beta and yield strategies under various discrete states, and document their long-run cumulative returns and alphas. Our findings suggest that beta and yield are negatively correlated, which implies that pursuing a low-beta (high-yield) strategy entails, to a certain extent, pursuing a high-yield (low-beta) strategy. Hence, each effect is somewhat attenuated when the other variable is controlled for. We find that the low-beta and high-yield anomalies are largely conditional on the state of the market, as they occur almost exclusively in periods with negative market returns. Additionally, we establish the robust long-run outperformance of low-beta and high-yield stocks. Our empirical analysis, which focuses on a class of equities with stable returns and considerable downside protection, draws practical lessons for conservative investors.