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We define “safe stocks” as those that have the characteristics of low market betas, high Sharpe ratios and low tail risk compared to the market portfolio. A profitable dividend yield (PDY) portfolio formed by combining stocks with high gross profitability with high dividend yield possesses all of these features. Despite their low betas, PDY portfolios have outstanding Sharpe ratios, more positive skewness and lower kurtosis in their returns than the market. Furthermore, an index of market-wide tail risk based on pseudo-bonds credit spreads loads negatively on the market’s returns but has no significant effects on PDY portfolio returns, suggesting that PDY portfolios come close to the ideal of a safe asset as defined in this paper.
KeywordsGross profitability Dividend yield Profitable dividend yield strategy Pseudo-bonds Option-based credit spreads
JEL ClassificationG10 G14
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