Does Dividend Policy Foretell Earnings Growth?

Cliff Asness, Robert Arnott

Research

34 Pages

This paper examines whether dividend payout policy helps predict future earnings growth, challenging the assumption that retaining more profits fuels faster growth. Using more than 100 years of market history, the authors find higher payout ratios were associated with stronger subsequent earnings growth, contrary to conventional intuition.

Key Takeaways

Higher Payouts Won: Across more than 100 years of data, higher dividend payout ratios were associated with stronger subsequent 10 year earnings growth.
Historical Norms Matter: The S&P 500 dividend payout ratio averaged roughly 50% from 1950 to 2001, while ending the period near a historical low.
Reinvestment Questioned: The authors examine 10 year forward earnings growth and find low payout ratios historically failed to produce the faster growth commonly expected from greater retained earnings.
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