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SDS (Seductive Dividend Stocks)
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Sorry I hide my true identity but I'm a physicist/engineer, native contrarian and idea generator. I am an eclectic dividend investor with motto "In God We Trust, All Others Pay Cash" applied to companies I invest in. I like to read /and read a lot - did you look on my SA photo 8-)? /... More
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  • Reading Academic Dividends Papers.... 2 comments
    Sep 26, 2012 3:04 AM


    I'd suggest to an investor without good knowledge of statistics NOT to read academic papers on finance and for dividend investor I'd suggest to read the book "Dividends and dividend policy" /H. Kent Baker (Editor) instead.
    I remember Warren Buffett quote "Beware of geeks bearing formulas". Nevertheless, I know statistics quite well (as physicist and engineer, not as mathematician or economist) and read some academic papers on dividends and there are notes:

    Why NOT to sell at dividends cut?:

    Market Response to Subsequent Dividend Actions of Dividend-Initiating and -Omitting Firms
    James N. Rimbey, Dennis T. Officer
    Quarterly Journal of Business and Economics, Vol. 31, No. 1 (Winter, 1992), pp. 3-20
    This study examines the tendency of many firm shares to move opposite the direction predicted by signaling theory upon the announcement of a major dividend policy change. This research attempts to reconcile such market behavior in the context of an A-firm/B-firm dichotomy created by conflicting signals sent by the firm. Investor uncertainty instead may stem from a lack of information reaching the marketplace.

    Dividend stocks: buy & hold with control:

    Long-Run Stock Returns: Participating in the Real Economy

    Roger G. Ibbotson, Peng Chen

    Financial Analysts Journal, Vol. 59, No. 1 (Jan. - Feb., 2003), pp. 88-98

    In the study reported here, we estimated the forward-looking long-term equity risk premium by extrapolating the way it has participated in the real economy. We decomposed the 1926-2000 historical equity returns into supply factors--inflation, earnings, dividends, the P/E, the dividend payout ratio, book value, return on equity, and GDP per capita. Key findings are the following. First, the growth in corporate productivity measured by earnings is in line with the growth of overall economic productivity. Second, P/E increases account for only a small portion of the total return of equity. The bulk of the return is attributable to dividend payments and nominal earnings growth (including inflation and real earnings growth). Third, the increase in the equity market relative to economic productivity can be more than fully attributed to the increase in the P/E. Fourth, a secular decline has occurred in the dividend yield and payout ratio, rendering dividend growth alone a poor measure of corporate profitability and future growth. Our forecast of the equity risk premium is only slightly lower than the pure historical return estimate. We estimate the expected long-term equity risk premium (relative to the long-term government bond yield) to be about 6 percentage points arithmetically and 4 percentage points geometrically.

    Will Stocks Continue to Outperform Bonds in the Future?

    Edward Renshaw

    Financial Analysts Journal, Vol. 53, No. 2 (Mar. - Apr., 1997), pp. 67-73

    Valuation of the earnings and dividends associated with the S&P 500 Composite Stock Price Index has changed over time. These changes, in conjunction with record amounts of retirement money that are now being funneled into mutual funds and wider fluctuations in the price of corporate bonds, suggest that the earnings and dividend price ratios for representative stock market averages may someday be reduced to the point where the before-tax returns on equities will not be greater than the returns on corporate bonds.

    Does the "Dow-10 Investment Strategy" Beat the Dow Statistically and Economically?

    Grant McQueen, Kay Shields, Steven R. Thorley

    Financial Analysts Journal, Vol. 53, No. 4 (Jul. - Aug., 1997), pp. 66-72

    A comparison of returns from 1946 to 1995 on a portfolio of the 10 Dow Jones Industrial Average stocks with the highest dividend yields (the Dow-10) with those from a portfolio of all 30 stocks in the DJIA (the Dow-30) shows that the Dow-10 portfolio beats the Dow-30 statistically; that is, the Dow-10 has significantly higher average annual returns. After adjusting for the Dow-10 portfolio's higher risk, extra transaction costs, and unfavorable tax treatment, however, the Dow-10 does not beat the Dow-30 economically. In some subperiods, Dow-10 performance is economically superior, but the question is how to interpret this information in light of the potential for data mining and investor learning.

    Dividend-Yield Strategies in the Canadian Stock Market

    Sue Visscher, Greg Filbeck

    Financial Analysts Journal, Vol. 59, No. 1 (Jan. - Feb., 2003), pp. 99-106

    The "Dogs of the Dow" strategy has become an increasingly popular investment strategy for unit investment trusts, resulting in superior performance for U.S.-based investors. To examine its effectiveness for Canadian investors, we applied this high-dividend-yield strategy to the Toronto 35 Index for the first 10 years of the index's existence. The 10 topperforming portfolios' higher compound returns were sufficient to compensate for taxes and transaction costs. Perhaps more important, both the Sharpe ratio, which measures excess return to total risk, and the Treynor index, which measures excess return to market risk, indicate that the strategy produced higher risk-adjusted returns than the Toronto 35. The Dogs strategy also performed well against the broader, but similar, Toronto Stock Exchange 300 Index.


    Please remember that academic papers might be wrong, esp. if written by PhD students. Below is humorous translator of some phrases from academic papers.

    Nevertheless I think academic papers are useful.



    Dividend Payout and Future Earnings Growth
    Financial Analysts Journal, Vol. 62, No. 3 (May/June 2006): 58-69
    Ping Zhou and William Ruland
    Because dividends reduce the funds available for investment, many market observers and investors associate high dividend payout with weak future earnings growth. Tests using aggregate market data, however, provided evidence that contradicts that view. Because aggregate results may not apply at the company level, we conducted a company-by-company analysis of the relationship between payout and future earnings growth. Our tests also show that high-dividend-payout companies tend to experience strong, not weak, future earnings growth. These results are robust to alternative measures of payout and earnings, sample composition, mean reversion in earnings, the effects of particular industries, time periods, and share repurchases.

    International Evidence on the Payout Ratio, Earnings, Dividends, and Returns
    Financial Analysts Journal
    Owain ap Gwilym, James Seaton, Karina Suddason, and Stephen Thomas
    January/February 2006, Vol. 62, No. 1: 36-53
    Recent evidence for the U.S. market has shown that, contrary to popular wisdom, the greater the proportion of earnings paid out as dividends, the greater the subsequent real earnings growth. This study extends previous work by examining whether a similar relationship exists in 11 international markets and by considering the role the payout ratio plays in explaining future real dividend growth and returns. Higher payout ratios do indeed lead to higher real earnings growth-but not to higher real dividend growth. This information has limited use, however, for predicting future returns.

    The Meaning of a Slender Risk Premium
    Robert D. Arnott
    Financial Analysts Journal March/April 2004, Vol. 60, No. 2: 6-8
    The superiority of stocks over bonds for the long-term investor is typically supported by two ideas-a hefty equity risk premium and the growth of dividends vs. nongrowing bond coupons. This piece challenges both ideas. The equity risk premium is unknown. We can estimate it (and all too often, we do so badly by merely extrapolating the past). Should a risk premium exist? Of course. Is its existence written into contract law for any assets we buy? Of course not. This piece develops the outcomes of stock versus bond returns if we accept a skinny risk premium. These "worst reasonable" (5th-percentile-outcome chance of a shortfall) calculations indicate that if the risk premium is 2 percent, wealth from stocks will be 50 percent behind wealth from bonds even after 35 years of patient investing. If dividend growth matches the 4 percent average rate for the 20th century, (1) dividend income (starting from the current 1.5 percent) will need 32 years to overtake bond coupon income and (2) cumulative income from stocks will require a startling 54 years to keep pace with that from bonds.

    What Is the Puzzle in "the Dividend Puzzle"?
    George M. Frankfurter
    Journal of Investing, Vol. 8, No. 2 (Summer 1999): 76-85
    A persistent riddle in modern finance is the "dividend puzzle." The puzzle is that, although dividends are taxed as ordinary income at the corporate and personal level, investors bid up the prices of stocks that pay dividends. Behaving in this way is not economically rational, and researchers have wrestled with this puzzle for 40 years. The author reviews this research and categorizes the various dividend models into four groups. The first two groups follow the formalism of modern finance theory and its assumption of economic rationality. The last two groups are skeptical of economic rationality but endeavor to use formal modeling techniques. The author then critiques each of these groups of models and offers his own resolution of the dividend puzzle.
    The first group of models is labeled "full information models." These models argue that two opportunity reinvestment rates exist-one for the company and another for the investor. If the investor's opportunity rate is greater, the investor will like dividends because he or she can earn the higher rate of return. The author finds this argument to be unconvincing: If the investor's opportunity rate is higher, why not sell the stock, invest the proceeds, and avoid double taxation altogether? Also, if the full information model is correct, then researchers should observe dividend payout rates of either 100 percent or 0 percent, respectively, depending on whether the investor's opportunity rate is greater or less than the company's. Instead, researchers observe dividend payments that grow steadily over time.
    The second group of dividend models is called "asymmetric information models." These models assume that corporate insiders know more about the future of their company than do outside investors. In the face of this asymmetric information, companies use dividends to signal investors. Dividends are a positive signal, and investors rationally process this signal by bidding up the company's stock. The author points out that much more efficient ways exist for corporations to communicate to investors. In addition, companies do not appear to pay dividends according to the asymmetric information model: Dividends grow steadily over time, irrespective of changes in the company's fortunes. In fact, companies rarely decrease dividends even if their prospects are grim.
    The next two groups of models depart from strict adherence to economic rationality. Instead, emphasis is placed on sociological and psychological factors as determinants of corporate dividend policy. The author labels the third group "behavioral models." These models argue that corporate dividend policy is not economically rational but is determined by societal norms and practices that can be better explained by sociological or psychological behavioral models. For example, executives in similar industries seem to be influenced by each other when setting dividend payout ratios. In addition, because shareholders like dividends, companies continue to pay dividends to engender feelings of stability and to avoid investor disappointment. Researchers are currently building formal behavioral models.
    The fourth group of dividend models relies on the use of "management surveys." These models directly ask corporate executives about their perceptions of their dividend policies. These surveys find that current corporate income determines dividend policy and that dividends are paid because shareholders expect dividends. The author sees explanatory merit in these last two groups of models.
    The author argues that the dividend puzzle is not really a puzzle after all, provided one is willing to abandon the economic rationality of modern finance theory. This statement does not imply that investors are irrational, only that investors rationally make decisions given the economic, social, and psychological context of the decision. The author argues that investors love dividends because investors have been conditioned to love dividends for 400 years. Investors constantly hear market professionals praise the attractiveness of high-dividend stocks. In addition, corporate executives loudly boast whenever they boost their dividends. With professionals constantly reiterating the benefits of "nonrational" dividends, instead of educating investors to the contrary, is it any surprise that investors continue to like dividends?
    The author asserts that there will never be an economically rational solution to the dividend puzzle. For the author, the real puzzle is that researchers keep trying to find such a solution.



    Dividends and Cash Flow: Controversy

    Simons, Kathleen
    Journal of Business Finance & Accounting VL - 21; Issue 4, pages: 577 - 587; Year: 1994
    It is often assumed that cash flow affects dividend payout. This study provides evidence on the incremental information content of cash flow numbers over Profits and Previous Year's Dividends (Lintner's model) in explaining changes in cash dividends. It further examines whether different measures of cash flow differ in information content for dividend-increasing and dividend-decreasing firms. Lintner's model of dividend changes is robust across firms with either dividend increases or decreases. The null hypotheses, that no definition of cash flow adds to the model, could not be rejected for any of the definitions.

    The Information Content of Dividend Changes: Cash Flow Signaling, Overinvestment, and Dividend Clienteles
    David J. Denis, Diane K. Denis, Atulya Sarin
    The Journal of Financial and Quantitative Analysis, Vol. 29, No. 4 (Dec., 1994), pp. 567-587
    We examine the cash flow signaling, overinvestment, and dividend clientele explanations for the information content of dividend change announcements. After simultaneously controlling for the standardized dividend change, dividend yield, and Tobin's Q, we find that announcement period excess returns are positively related to the magnitude of the standardized dividend change and to the dividend yield, but unrelated to Tobin's Q. We provide further evidence on the cash flow signaling and overinvestment hypotheses by examining revisions in analysts' earnings forecasts and changes in capital expenditures following dividend change announcements. We find that analysts significantly revise their earnings forecasts following dividend changes and that $Q < 1$ firms actually increase their capital expenditures following dividend increases and decrease them following dividend decreases. Overall, our findings support the cash flow signaling and dividend clientele hypotheses for stock price reactions to dividend change announcements, but provide little support for the overinvestment hypothesis.

    Larry H. P. Lang and Robert H. Litzenberger
    Dividend announcements: Cash flow signalling vs. free cash flow hypothesis?
    Journal of Financial Economics, Volume 24, Issue 1, September 1989, Pages 181-191
    We test the cash flow signalling and free cash flow/overinvestment explanations of the impact of dividend announcements on stock prices. We use Tobin's Q ratios less than unity to designate overinvestors. The average return associated with announcements of large dividend changes is significantly larger for firms with Q's less than unity than for other firms. This evidence, the results of further tests involving a finer partition of the data, and an analysis of changes in analysts' earning forecasts surrounding dividend announcements support the overinvestment hypothesis over the cash flow signalling hypothesis.

    SDS: It seems that no agreement exist in academia on (free) cash flow role in dividends.


    Well it is not Exactly a dividend paper, anyway 2 graphs below from

    Stock Market Returns in the Long Run: Participating in the Real Economy
    By Roger G. Ibbotson, Ph.D. and Peng Chen, Ph.D., CFA
    Estimates forward-looking long-term equity risk by extrapolating its participation in the real economy. Decomposes historical equity returns from 1926-2000 into factors including inflation, earnings, dividends, P/E, dividend payout ratio, book value, ROE, and GDP per capita.

    (click to enlarge)

    (click to enlarge)

    I read this paper in the book

    The Equity Premium: Essays and Explorations / Goetzmann, William N. and Roger G. Ibbotson

    26 July 2014

    We had a lot of discussions on dividends this spring/summer on SA. MPT proponents argue that stock price should drop on dividend ammount on ex-dividend day, so dividends do not add anything for investors. More detail studies (see below) from show that the drop is significanly smaller than dividends, so the argument above is invalid IMO.

    Ex-Dividend Day Stock Price Behavior - The NASDAQ Evidence


    Shishir K. Paudel / Binghamton University ; Hartwick College
    Sabatino Silveri / Binghamton University


    We use dividend-paying Nasdaq-listed firms as a setting to test various explanations of the ex-day price anomaly. Similar to NYSE-listed firms, on average the prices of Nasdaq-listed firms drop by less than the dividend amount on the ex-day. However, the average price-drop is half that observed for NYSE-listed firms and translates to an imputed dividend tax rate that is double the average maximum tax rate over the sample period. In addition, we find the ex-day price-drop increases in dividend yield, opposite the prediction from a tax clientele explanation. Moreover, for non-taxable distributions we find prices behave in a similar manner to taxable distributions on the ex-day, again suggesting taxes are not the primary reason for the price behavior. In sum, we find little support for tax-based explanations. We also find little support for short-term trading and market microstructure explanations. Importantly, our results are robust to transaction costs as proxied by stock price, liquidity, volatility, firm size and bid-ask spread. We supplement our analysis by investigating a subset of firms that voluntarily switch from the Nasdaq exchange to the NYSE. The average price-drop for the switching firms is similar to the Nasdaq average prior to the switch and resembles the NYSE average immediately after the switch. This change in price behavior potentially reflects a changing investor base and suggests the marginal investor of Nasdaq dividend-paying firms places relatively less importance on dividends. Overall, our results call into question the various explanations of the ex-day anomaly. Any potential explanation also needs to account for the Nasdaq evidence.

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  • Bob Wells
    , contributor
    Comments (5168) | Send Message
    There's a great film called "My Dinner with Andre" nothing more than a discussion between two people over dinner. Couldn't help but wonder what it would be like if there was a film about an investment Phd jounalist...called "My Dinner with chowder". HA


    28 Jun 2012, 05:29 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3178) | Send Message
    Author’s reply » Bob,
    Unfortunately I did'n see it. Will check.
    28 Jun 2012, 07:04 PM Reply Like
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