WorldBeta

Top 10 Payout Yield Stocks

The problem with Seeking Alpha pulling content from a blog is that is is often taken out of context from what long time readers are aware of. To alleviate all of the confusion regarding my post, here is some history.

Over a year and a half ago I profiled an academic paper by Boudoukh, Michaely, Richardson, and Roberts is titled, "On the Importance of Payout Yield".

Dividends are only one way of returning capital to shareholders. Share repurchases are another such method (see MSFT), and since they are not taxed like dividends, it can be argued they are a more efficient way of returning profits. Buybacks represent about half of all shareholder payouts, and have increased steadily since the early 1980's. There is a structural reason for this, and is due primarily to the SEC instituting rule 10b-18 in 1982 - providing a safe harbor for firms conducting repurchases from stock manipulation charges. See Grullon and Michaely [2002] for more info on the impact of Rule 10b-18.

The authors of the above paper examined the payout yield and net payout yield, whose formula is:

Payout Yield = $ spent on dividends + $ spent on share repurchases
(Net payout is simply subtracting the $ raised through new share issues to the above formula)

The authors find that "the widely documented decline in the predictive power of dividends for excess stock returns is due largely to the omission of alternative channels by which firms distribute and receive cash from shareholdlers." Additionally, while dividend yield has lost its predictive ability over time, the payout yield has remained a robust indicator for excess stock return.

About a year later I posted a review of another academic paper titled "Asset Growth and the Cross-Section of Stock Returns" by Schill, Gulen, and Cooper. This paper is even more encompassing. It basically says a decrease in total assets is good - things like dividends, buybacks, spinoffs, and paying down debt. Ominous signs for future stock performance - acquistions, share issuances, borrowing, and sitting on lots of cash.

My article is only an update to these previous articles and hlighlights the terrible performance of two strategies that rely on dividend based screens.