Dividend Yields and Stock Returns: Evidence from the Korean Stock Market*

Abstract

This paper examines the relation between dividend yields and stock returns in the Korean market, and provides some valuable implications in light of certain institutional features of the Korean market that differ from those in the USA and other countries. For five portfolios ranked by the long-term dividend yield we find that stocks with higher dividend yield earn higher risk-adjusted returns. Because after-dividend-tax returns are used in the present paper, this evidence suggests that the tax-effect hypothesis proposed by Brennan (1970) is not supported in the Korean stock market and non-tax reasons for the yield effect exist. Interestingly, the positive relation between yields and returns is common in all months except January in the Korean market, and is observed in both large-firm and small-firm stocks. In contrast with Keim (1985), this evidence suggests that the dividend yield effect is not another manifestation of the size effect. In addition, we find that the yield effect is not affected by excess returns around the ex-dividend day, which coincides with the year end.