Are Dividend Yield and ROE Smart Portfolio Fundamentals? The Recent Case of Japan

Abstract

This paper attempts to test whether dividend yield and ROE are important fundamentals for obtaining positive alpha by using a four factor asset pricing model. As a result, our investigations derive several interesting findings as follows. First, (1) we clarify that for the period from January 2009 to March 2013, our second highest and third highest dividend-yield portfolios deliver statistically significant positive alphas. Second, (2) we also reveal that for the period from January 2009 to March 2013, our second highest and third highest ROE portfolios yield statistically significant positive alphas. Overall, our empirical examinations demonstrate that after the Lehman shock period, dividend yield and ROE are the important fundamentals for constructing smart portfolios in Japan.