Stock Returns, Dividend Yields, and Taxes

Authors

  • Andy Naranjo,

    1. Graduate School of Business Administration, University of Florida
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  • M. Nimalendran,

    1. Graduate School of Business Administration, University of Florida
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  • Mike Ryngaert

    1. Graduate School of Business Administration, University of Florida
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    • Graduate School of Business Administration, University of Florida. We thank Dave Brown, Bill Christie, Mark Flannery, Charles Hadlock, Miles Livingston, Jim Poterba, Jay Ritter, Paul Seguin, René Stulz (the editor), and two anonymous referees for valuable comments and suggestions. We also thank Ken French, Tim Loughran, and Jay Ritter for providing us with data, and Hui Yang for excellent research assistance.

Abstract

Using an improved measure of a common stock's annualized dividend yield, we document that risk-adjusted NYSE stock returns increase in dividend yield during the period from 1963 to 1994. This relation between return and yield is robust to various specifications of multifactor asset pricing models that incorporate the Fama–French factors. The magnitude of the yield effect is too large to be explained by a “tax penalty” on dividend income and is not explained by previously documented anomalies. Interestingly, the effect is primarily driven by smaller market capitalization stocks and zero-yield stocks.

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