Do Income Stocks Provide Higher Total Return than Growth Stocks? Empirical Data Analysis

Abstract

The fundamental issue in the investment process is not only how much to invest but also, what stocks to invest. It takes an average investor to make fundamental and/or technical analysis to select the best stock in the market. Of course, the selection dilemma does not lie with which company pays the highest dividends. It lies withwhich stock type (growth or income), provides highest payoff (total return) in the long run. The purpose of this study is to establish whether or not income stocks outperform growth stocks over time, and to offer valuable insights to new and existing investors as towhich path to take when it comes to stock selection. The study takes an empirical approach of analyzing existing data in order to make conceptual contribution to the body of knowledge in the literature of investment finance.In fact, the widespread rally behind dividend-paying stocks is not just a fad but has been supported by empirical evidence (data). Generally, growth stocks provide lesser total returns to the investor than income stocks. A test of mean differences of yields between income and growth stocks saw the yield (4.0) of income stocks almost doubling the yield (2.2) of growth stocks. Analysis of the data further indicatesthat dividends have played significant role in increasing total return in the history of investment. This was evident when average annual equity returns have been lower than 10% during a decade. Further analysis of data also, revealed the consequences of different dividend-policy implementations. The study established that dividend growers and initiators have historically achieved higher total return with less volatility than companies that either maintained or cut their dividend payment. Furthermore, dividend yield appeared to be significant in selecting stocks. Surprisingly, the study found that Stocks in the highest quintile of dividend yields have performed less, relative to stocks in the second quintile over time.