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