Dividend payout and future earnings growth: A South African study

Abstract

Conventional wisdom posits that the payment of dividends will decrease the funds available to finance growth, and will therefore lead to lower future earnings growth. This belief was challenged in recent years with research that tested the relationship between dividend payout and future earnings growth, both on the individual company level and aggregate market level in different countries. Recent results contradict popular belief, and show that companies with high payout ratios tend to realise stronger future earnings growth. This study investigated the same relationship in South Africa, as an example of a developing country, using a large sample of 12,669 company-years over the period 1973 to 2009. The results fully support recent findings that dividend payouts precede higher future earnings growth.