The following investment analysis by Rufus Mwanyasi was first published in the Business Daily.

“For income-oriented investors, dividend yield is clearly an important source of investment returns. However, one must always be wary of sacrificing capital gains in the process. Just because a company pays a high dividend yield today, does not mean it will perform on the price side.

This leads to the question; Is there a simple strategy that brings out the benefit from both worlds? In this article I seek to answer this question. I propose that investors who wish to yield a steady income from their investments while also enjoying the benefit of capital appreciation would do well to consider stocks with the highest dividend yields.

To demonstrate this, I took the top 15 dividend yielders by the close of 2013 and tracked their price performance in the following year. Amazingly, these companies posted an average rate of return of above 14 per cent in the last year compared to a meagre 3.8 per cent returned by the NSE 20-Share Index.

Adding the average dividend yield of 5.97 per cent, the total return of these stocks rocketed to an impressive 20 per cent. Overall, two-thirds of the selection beat the index, which is quite admirable.

What I like most about this strategy is its passivity. An investor only needs to enlist the top yielders at the beginning of the year, invest in the selected stocks and wait.

The positive expectation in the strategy allows one to expect an additional return beyond the benchmark, which in this case is represented by the NSE 20-Share Index. Simple it may seem, but a powerful strategy nonetheless.

While the results confirmed my initial suspicions that higher yielding stocks provide better overall returns, the one-year return is too short to provide conclusive evidence.

Therefore, it should be noted that due to the nature of this analysis, these results are not universal and one may well find stocks that have a high yield with a low return and vice versa.

Take the example of Carbacid, despite having the highest yield of 11.65 per cent, the stock dipped by a killer 58 per cent. Counter-arguments on the basis that the company had a bonus and split in the same year do not stand.

Longhorn Publishers, another disappointing high yielder, fell 32 per cent in value despite spotting the eighth highest yield of 5.93 per cent. Other notable losers include Bamburi and KenGen. Nonetheless, I believe the great performance of the higher yielders can be generalised to longer time periods.

As a caution, investors need to run the model with a longer term to help smooth out effects of returns on the measurement of the dividend yield over time in order to provide more credence to these results. Generally, investors who wish to get a steady income from their investments while also enjoying the benefit of capital appreciation would do well to consider stocks.”