Dividends and (Net) Payout Yield

Nice article from my friend Jake over on EconompicData on buybacks and dividend yields.

I used to spend a lot of time talking about dividends and returning capital to shareholders, and still can’t understand the focus on (just) dividends.  An older post here: A Better Dog.

Highlight from the article:

A wonderful paper scheduled for April publication in the Journal of Finance takes a new twist on the Dogs of the Dow strategy. The 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 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.

But then again, WisdomTree isn’t going to tell you that, are they?