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Looking Beyond Dividend Yield: Finding Value in Cash Distribution Strategies

Highlights

Investors have historically been rewarded for investing in higher-yield stocks globally.

Historical test results for yield-oriented strategies were stronger in the Russell 3000 Growth than in the Russell 3000 Value universe.

Cash flow growth and capital efficiency metrics can enhance the performance of a shareholder yield strategy.

Global dividends payouts rose 7.8% to a first-quarter record of $263.3 billion,1 while S&P 500 companies repurchased $227 billion of their own shares. Do such payouts benefit stockholders? In this paper, we examine the relationship between yield-oriented strategies (dividend yield, buyback yield, and combined shareholder yield, or SY) and future stock return, across multiple countries/regions. We also provide insights into two additional topics:

  • Which company fundamental characteristics support and enhance future shareholder payouts?
  • Under which interest rate environment should investors favor yield-oriented strategies? Investors generally assume that yield-oriented strategies, such as dividend yield, perform well in a low interest rate environment as they can offer a more attractive yield than other asset classes such as bonds.

Our research findings include:

  • Investors have historically been rewarded for investing in higher-yield stocks globally. In the US and Europe, buybacks outperform dividends, as the former has become a preferred way for companies to return cash due to tax advantages. In Japan, where interest rates remain depressed, dividend yield works best. In developed Asia (ex-Japan) and the emerging markets, the combined shareholder yield (SY) strategy was most effective (Exhibit 3 and Exhibit 10). Annualized long-short return for the combined shareholder yield (SY) strategy ranges from 6.3% to 12.6% across regions.
  • Cash flow growth and capital efficiency metrics can enhance the performance of a shareholder yield strategy. Firms ranked highest (lowest) on both SY and 3-year cash flow growth, or highest (lowest) on both SY and cash flow return on invested capital, outperformed (underperformed) across all regions (Exhibit 8 and Exhibit 11). This result confirms our hypothesis that high-yield firms with improving cash flow metrics have a higher probability of sustaining their yield compared to their peers with deteriorating metrics.
  • Counter to our hypothesis, the return difference between rising and falling interest rate regimes for yield-oriented strategies in the US is not significant, indicating that yield-oriented strategies are equally effective across interest rate environments (Exhibit 7).
  • Historical test results for yield-oriented strategies were stronger in the Russell 3000 Growth than in the Russell 3000 Value universe. A growth company that also has high shareholder yield may signal that the firm is confident in its ability to fund both cash distributions to shareholders and future growth opportunities from cash flows (Exhibit 5).
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