The convexity of the earnings yield: does the dividend payout policy matter?

Abstract

This paper uses a nonlinear model to examine the relationship between the earnings yield and the dividend payout ratio of international stock markets over the period 1995-2015. This paper produces new evidence indicating that the convexity of the earnings yield has important implications for dividend policy decisions and equity investment choices. Increases in payout ratios were found to have less influence on the earnings yield than decreases in payout ratios. Furthermore, the earnings yields of firms with low payout ratios generate a larger effect from changes in payout ratios than firms with high payout ratios.