Aug 4, 2010
Q&A
Does an equity strategy focusing on stocks with above-average dividend yield offer an appealing risk/reward tradeoff? Have dividend-paying stocks outperformed non-dividend payers in the U.S.?

EFF/KRF: Ranking stocks on dividend yield is just another way to separate value stocks from growth stocks using the ratio of a fundamental to price. We prefer to use other fundamentals, like book value or cashflow, in the numerator of the price ratio, for a simple reason: roughly 80% of all listed U.S. stocks and almost all small firms do not pay dividends.

Dividends were more common in the past, and like sorts of stocks on book-to-market equity or cashflow to price, sorts on dividend yield do identify a value premium (higher average returns for higher dividend yields) in international markets as well as the U.S. (Fama and French 1993, 1998). Sorts on book-to-market equity or cashflow to price seem to do a better job identifying value premiums, possibly because dividends are subject to more managerial discretion than other fundamentals.

 
ABOUT FAMA AND FRENCH
Eugene F. Fama
The Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business
Kenneth R. French
The Roth Family Distinguished Professor of Finance at the Tuck School of Business at Dartmouth College
This information is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Dimensional Fund Advisors and does not represent a recommendation of any particular security, strategy or investment product. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP.