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Dividend investing performance and explanations: a practitioner perspective

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Purpose ‐ The purpose of this research is to investigate the risk and return characteristics of dividend investing compared to a passive "market" approach and provide probable explanations for any differences in return and risk. Design/methodology/approach ‐ The research design is a standard time series analysis of two different data sets containing information about return for "dividend portfolios" and the "market portfolio". Findings ‐ Investing in high dividend-paying firms earns abnormal returns in a long short-strategy in the USA and in world indices, confirming earlier studies. Different overlapping strategies and agency theory are used to provide explanations for the dividend strategy's persistence. Research limitations/implications ‐ While the US findings were significant at conventional levels, the results using the world indices had significance levels that were slightly below the usual academic cut off but may be acceptable to practitioners. Practical implications ‐ Seemingly anomalous findings should disappear once reported, yet the high dividend-paying strategy continues to persist and this article provides some explanations relating to the value strategy, beta puzzle and agency theory. Social implications ‐ Paying dividends may be socially responsible since it is explained as a way of deploying free cash flow in an efficient manner rather than wasting money through overpriced acquisitions or buybacks of overpriced shares. Originality/value ‐ By using different databases, earlier research is confirmed and also found to be robust across different time periods. The contribution of this paper is to link the value premium, the beta puzzle and agency issues of free cash flows together to explain the outperformance and persistence of dividend investing from a practitioner viewpoint.
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Keywords: Agency cost of free cash flow; Beta puzzle; Dividend investing; Dividends; Investments; Value premium

Document Type: Research Article

Publication date: June 21, 2013

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