Dividends And Stock Valuation: A Study From The Nineteenth To The Twenty-First Century (Page 19 of 45) in pdf

Dividends And Stock Valuation: A Study From The Nineteenth To The Twenty-First Century Page 19

dividends over period 1 (1871-1913); an even smaller growth rate in period 2 (1914-1945) but a much

higher growth in dividends in period 3 (1946-2003). The differences between periods are not significant

across either periods 1 and 2 or periods 2 and 3. This is likely due to the high variability in the results,

especially in the first two periods clearly demonstrating how the volatility of dividends has changed over

time, decreasing significantly in the post World War II period where we see persistent, small increases.

We also see that earnings generally grew at a slightly faster rate than dividends across all periods.

We also find a much higher standard deviation for earnings than dividends. Coupled with the lower

changes in dividends than in earnings, these findings suggest a reluctance of managers to change

dividends in response to changes in earnings; in other words, a stickiness in dividend policy. This is

consistent with our observations from Figure 1 – the changes in the dividends are much smaller but

coincided with changes in earnings before 1900; post-World War II the changes in dividends are smaller

and more frequent but no longer appear to follow the changes in earnings. The dividend payout ratios are

high in both periods 1 and 2 (about 70% in both periods) but decrease significantly in the period 3 (50%).

A t-test rejects the null hypothesis of the equivalence of the means between periods 2 and 3 (the p-value is

less than 0.001) but not between periods 1 and 2.

In Table 1 we also find information from an investor’s perspective. We see that the dividend yield

contributes a substantial portion of the total return: almost 40%.

Although the dividend yield is

significantly lower in the latter period, consistent with other studies, it is clear that dividends continue to

have a major impact on total equity returns. Capital gains for the index are consistent over the first two

sub-periods (as were the dividend yields) but they increase substantially in the more recent 1946-2003

period. In this period, capital gains dominate the total returns making up about 68% of the total returns.

These results suggest that, more recently, either investors value capital gains more than dividends, or

firms more actively pursue growth strategies and are therefore re-investing more funds as opposed to

paying them out to shareholders in the form of dividends. We cannot reject the null hypothesis of no

difference in the total returns before and after World War II but we do reject the null hypothesis of no

difference in the dividend yields over these periods. The final characteristics we consider is the P/E ratio.

Dividends And Stock Valuation: A Study From The Nineteenth To The Twenty-First Century Page 19