Value investing in the Scandinavian context : inspired by “Dogs of the dow”

Abstract

The objective of this thesis is to investigate the relevance of the high dividend-yield strategy, “Dogs of the Dow” (DoD), combined with two additional value investing strategies. All strategies are examined in a Scandinavian context for a Norwegian based investor in the period 2005 to 2019. We find that the price-to-earnings strategy beats the reference index over the investment period in terms of raw returns, while the DoD strategy obtains the same returns as the reference index. The price-to-book strategy underperforms both the two other strategies and the reference index in terms of raw returns. We do a thorough investigation of transaction costs and taxes which we later use to adjust the raw returns. We find low tax costs associated with the value strategies for the Scandinavian market, especially when dividends are low, since capital gains are not taxed immediately. When adjusting for transaction costs and taxes, only the price-to-earnings strategy outperforms the reference index slightly based on raw returns. When risk-adjusting the raw returns with the Sharpe ratio and Treynor index, we find that our value strategies underperform when the stock market decline rapidly. Further, we analyse the raw returns using single-factor and multi-factor regression models. When including momentum in Carhart’s four-factor model, we find annual abnormal returns of 5.60 and 9.40 percent for the DoD and the price-to-earnings strategies before transaction costs and tax adjustments. When we run the regressions on the returns adjusted for transaction costs and taxes, alpha is no longer statistically significant for the DoD strategy. As for the price-to-earnings strategy, the alpha decreases to 8.60 percent and remains statistically significant on a five percent level. Altogether the results obtained in this thesis indicate that the DoD and price-to-book strategies do not create abnormal returns for the Norwegian based investor with the applied regression models, after adjusting for transaction costs and taxes. However, we find indications that the price-to-earnings strategy creates abnormal returns for the investor in this thesis. Keywords: Value Investing, Dogs of the Dow, Dividends, Price-to-Earnings, Price-to-Book, Tax.