Much Ado About Dividends

The aim of this paper is to research dividend signals as an investment strategy. The paper first provides a thorough synopsis of the nature of dividend payouts (what it constitutes and why it is paid) - highlighting that domestically there is a large emphasis on companies paying out dividends habitually (following the UK model). We then consider the when - focusing on the timing of relative outperformance of globally traded systematic dividend strategies. We finally consider which dividend signals matter in SA, considering the absolute and risk-adjusted performance of systematically constructed dividend yield and dividend per share growth signal portfolios. The structure for the applied section follows.

We construct systematic quintile portfolios dating back to 2003, in order to compare the performance (absolute and risk-adjusted) of variants of available dividend signals;

• We find that Dividend Yield (DY) and Dividend Per Share Growth (DPSG) signals are significantly improved by first filtering for the top risk-adjusted momentum stocks. – This makes intuitive sense since such a filter helps avoid the DY-value trap, and down weights companies that have an impaired ability to sustain future dividend payouts (as companies with weaker balance sheets and depleted cash-flows would more likely have experienced a negative price momentum).

• Accounting for the sustainability of dividends by simply filtering out companies with high payout ratios, also improve both DY and DPSG signals.