Dividends and Momentum

Abstract

This article investigates the relationship that exists between dividend yield and momentum strategies. Both have been shown to explain the cross-section of returns, and yet they are negatively related to each other. The article finds that the outperformance of zero dividend stocks disappears when returns are measured on a value-weighted basis. Both value and momentum strategies work when the other is controlled for, although momentum is found to be the more statistically significant effect. Momentum seems to be most effective in lower dividend yield quintiles. When 130/30 portfolios were formed, this generated several percentage points of return on an annualized basis, although there was a broadly commensurate increase in volatility.