Growth and Dividend Factors

Beyond value, momentum, quality and size, researchers have studied factors based on how companies grow, how much they invest and how much cash they return to shareholders. Some findings are surprising: companies that grow their assets aggressively have tended to deliver lower future returns than conservative ones, and simple high dividend strategies have not consistently beaten the market once other factors are considered. These factors help explain portfolio returns and guide income and growth investors.

Growth: popular but not a factor premium#

"Growth stocks" usually means companies with fast revenue or earnings growth and high valuations. Research has generally not found a reliable premium for buying fast growers; in fact, growth stocks as defined by high valuations are the opposite side of the value factor. Strong growth is often already priced in. What has shown more promise is improvements in fundamentals that the market has not fully priced, such as rising earnings estimates. See Guidance and Earnings Revisions and Value Factor.

The investment factor#

Companies that rapidly expand their assets, through capital spending, acquisitions or issuing shares, have tended to underperform companies that invest conservatively.

Explanations include empire building by managers, overinvestment when shares are expensive and lower expected returns for firms with abundant investment opportunities. See Capital Allocation and Management.

Issuance and buybacks#

Related research found that companies issuing new shares tend to underperform and those buying back shares tend to outperform, the "net share issuance" effect. Combined with dividends, this leads to the shareholder yield measure. See Secondary Offerings and Rights Offerings and Buybacks.

shareholder yield = dividend yield + net buyback yield (+ debt paydown yield, in some definitions)

Dividend factors#

Risks of dividend strategies#

• Yield traps: high yields can signal distress. See Free Cash Flow Yield and Dividend Yield.
• Sector concentration: utilities, real estate, energy and banks dominate high yield screens.
• Interest rate sensitivity: high dividend stocks often behave like bonds.
• Tax considerations for investors who receive dividends. See Trading Taxes and Capital Gains.

Using these factors#

• Avoid aggressive asset growers and heavy issuers in stock selection.
• Use shareholder yield rather than dividend yield alone for income and value strategies.
• Combine with quality and value to avoid traps. See Combining Signals.

Frequently asked questions#

Is there a growth factor premium?#

Research has not found a reliable premium for buying fast growing, highly valued stocks; growth is largely the opposite of value.

What is the investment factor?#

The tendency for companies that invest conservatively to outperform those that grow their assets aggressively.

Is a high dividend yield strategy a good factor?#

High dividend yield is largely explained by value and quality exposure; shareholder yield, including buybacks, captures cash returns more completely.

Next, learn about short and long horizon reversals in Short and Long-Term Reversal.