Aug 4, 2010
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.

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
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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.