Welcome to Payout Yield.

We started this site because you are going to be hearing a lot more about the terms Payout Yield and Net Payout Yield and their importance in predicting investment returns.

The power to predict excess stock returns by simply looking at a company’s dividend relative to its stock price, or its Dividend Yield, has declined over time. We needed to find a new way to uncover stocks that have a better than average chance to outperform the market. The academic community has determined that we should look at all the ways that a company returns cash to shareholders. In other words, we should take into account stock repurchase programs in addition to the dividend payments.

Combining the Dividend Yield with the Repurchase Yield is what the academics have termed Total Payout Yield. One caveat is, that in addition to returning cash to shareholders, stock repurchase programs also serve to offset the dilution from management stock and option programs. So, ignoring the portion of the repurchase that simply keeps shareholders whole results in the more predictive Net Payout Yield.

Wharton’s Michael Roberts and others have been publishing their work on Payout Yield since at least 2003 (see SSRN for abstracts and papers) and have another article in the April 2007 Journal of Finance. Smart Money magazine picked up on the Payout Yield concept and ran a short story in the Stock Screen section of their March 2007 issue.

In future posts on the Classroom page, we’ll cover why Payout Yield works and show how to use it to identify stocks that have the potential to outperform the market.

Your comments are welcome.