Contingency Tables of Dividend Yields vs Dividend Payout
Issue: Contingency table of dividend yield versus dividend payout for 35 growth stocks and 35 value stocks are used to analyze the sustainability of dividend payouts.
Contingency tables for the two portfolios are presented below.
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Contingency Table for Dividend Yields vs Payout Ratios – Growth Firms |
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| Dividend Yield | |||||
| Dividend Payout | 0 | >0 & <=2 | >2 & <4 | >=4 | Total |
| 0 | 9 | 0 | 0 | 0 | 9 |
| <=50 | 0 | 13 | 1 | 0 | 14 |
| >50 & <=90 | 0 | 2 | 5 | 0 | 7 |
| >90 or <0 | 0 | 0 | 4 | 1 | 5 |
| Total | 9 | 15 | 10 | 1 |
35 |
| Contingency Table for Dividend Yields vs Payouts –
Value Firms |
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| Dividend Payout | 0 | >0 & <=2 | >2 & <4 | >=4 | Total |
| 0 | 1 | 0 | 0 | 0 | 1 |
| <=50 | 0 | 5 | 5 | 2 | 12 |
| >50 & <=90 | 0 | 2 | 5 | 0 | 7 |
| >90 or <0 | 0 | 3 | 10 | 2 | 15 |
| Total | 1 | 10 | 20 | 4 | 35 |
Comments on the Construction of the Contingency Tables:
The columns of the table are based on the dividend yield defined as annual dividend payments as a percent of the current stock price. The dividend yield measures the generosity of a firm’s dividend.
The dividend yield categories are – yield = 0, yield > 0 &yield <2, yield >=2 and yield <4, and yield >=4.
The rows of the table are based on the dividend payout ratio defined as dividend as a percent of income. The dividend payout ratio measures the ability of a firm to maintain dividends in the future.
A dividend paying firm with negative earnings (or an undefined dividend payout ratio) is not likely to be able to continue paying dividends.
The four dividend payout ratios considered here are payout =0, payout<=50, payout>50 & payout<=90 and payout >90 or payout<0.
Note I have placed firms with negative earning that are currently paying dividends and firms with dividend payout ratios greater than 90 in the same high dividend payout category. This makes sense because firms with high dividend payout ratios and firms paying dividends even though they have negative earnings will have trouble sustaining dividend payments unless earnings grow.
Note also by definition of yield and payout all firms with dividend yield equal to 0 also have dividend payout equal to 0.
Observations about dividend payments and sustainability of payments for growth and value firms:
Growth firms pay less in terms of dividends than value firms. There are 9 of 35 growth firms with a 0% yield compared to 1 of 35 value firm that pays no dividends.
A substantial percent of value firms may not be able to sustain their current dividend level. 15 value firms have a dividend payout over 90 or under 0 compared to only 5 of 35 growth firms.
Concluding Remarks: The tech sector and growth ETFs have led the market upwards over the past couple of years. A lot of analysts believe that the market can continue upwards through a rotation to value stocks.
I don’t see this happening. Over 40 percent of my sample of dividend paying value firms has a payout ratio over 90 or negative earnings. Their current dividend yield while attractive may not be sustainable.
A previous analysis of PE ratios indicated that many analysts are understating the overvaluation of value firms by ignoring firms with undefined PE ratios.
https://financememos.com/2018/09/12/valuation-of-growth-and-value-stocks-with-pe-ratios/