Dividend yield is the ratio of a stock’s annualized dividend to its market price. It is related to value but captures distinct risk characteristics driven by tax clientele effects, sector concentration (utilities, REITs, telecoms), and payout policy preferences.
Empirical evidence
Naranjo, Nimalendran, and Risch (1998) found evidence of a positive relationship between stock returns and dividend yield, suggesting a tax-related premium.
Construction in MAC3
The MAC3 model uses Bloomberg indicated dividend yield (DIVIDEND_INDICATED_YIELD): the most recently announced dividend, annualized, divided by the current market price. It is a single-descriptor factor.
Separation from value
MAC3 separates dividend yield from the broader value factors (earnings yield and valuation) because:
- High-dividend stocks cluster in specific sectors with distinct risk profiles
- Tax treatment creates clientele effects that drive comovement independent of value
- Dividend policy is a deliberate corporate choice, unlike price-based value ratios which are market-determined
In academic models, dividend yield is not a standard factor. The FF3 and FF5 models use book-to-market as their value measure. However, the QMJ framework implicitly touches on dividends through its payout-related reasoning in the Gordon growth model decomposition.
Sources
- MAC3 Global Equity Risk Model (File)