The influence of dividend yield and dividend stability on share returns: Implications for dividend policy formulation

Abstract

The relevance of the dividend decision has been a contentious issue in corporate finance research, partly due to contradictory views reported in existing literature. When faced with the dividend decision, management should understand its impact on shareholder value maximisation. This paper investigates the influence of the dividend decision on share returns for a sample of firms listed on the JSE from 1990 to 2010. Firms are allocated to portfolios based on dividend yield and dividend stability, and risk-adjusted abnormal returns for these portfolios are estimated. Results indicate that share returns were influenced not only by dividend payments levels, but also by the stability of these payments over time. The nature of a firm’s dividend decision could therefore have an effect on its share return. Although these results contribute to understanding the dividend characteristics that are relevant to investors, future research should investigate different types of dividend policies in order to assess specific investor preferences.