Over the time frame covered by this part of the study, the majority of nonspecific or explainable performance contribution actually stems from the market exposure as shown in Figure 20, which is due to the strong performance of the European market over the time frame, and is not actually relevant to this analysis. The low specific-return component is typical for the broad index type that is used here for the analysis.
Now we run the same analysis for the dividend index and compare the results. The results of the factor analysis for the dividend index are shown in Figure 21.
The dividend index shows a much lower exposure to the value factor but similar negative exposure to the growth factor, indicating that the actual payment of dividends is a stronger counter-indicator for growth than it is an indicator for value. Similarly to the value index, we see a relatively small actual performance contribution from the traditional factors. The dividend index, as expected, shows somewhat of a strong negative exposure to volatility, further supporting the argument for the stability of high-dividend-paying companies. The actual return contribution from the volatility factor in fact easily outweighs the entire value/growth complex.
Comparing the results, it becomes obvious that the value index selection indeed generates higher exposure to the value factor and very low exposure to leverage, while the dividend index has lower exposure to value but shows significantly lower exposure to volatility and even lower exposure to the growth factor.
Given the evidence presented above, a case can be made that simple dividend-based stock selection strategies with a small number of selected components form an easy and transparent alternative substitute for more complex value-based schemes, showing even more effective results in the selection-related categories for value indexes. However, the same cannot be said with regard to using a value approach to identify high-dividend-yielding stocks, when the dividend yield of a large part of the selected stocks lags behind the average of the base portfolio. Looking at the returns over a longer period of time suggests that both concepts provide more conservative approaches to portfolio selection than a market-cap-weighted index. Investors looking for pure value exposure fare better with a value-based selection method; however, if the focus is on lower volatility exposure, dividend-based selection methods may provide a strong alternative. From the factor breakdown, we can certainly conclude that while the portfolios may look similar in terms of basic characteristics, they do differ quite strongly with regard to their style factor exposures, justifying the existence of each method.