BC_MBA_student

Thanks AF buddies. My question basically arose after reading The Little Book That Beats the Market which espouses the Earnings Yield (specifically EBIT / Enterprise Value) as the key metric. However, another line of thinking that I was reading states that if you dissect long run returns to equities, then it is the dividend yield that is crucial because you receive hard cash. I'm trying to figure out a set of screens. I'm conscious that earnings yield as stated is pre-tax and debt distortions which is helpful in creating a level playing field. But cash is cash is cash. And paying cash keeps companies honest, sorta. Realise that I need to do more reading into this and may be losing sight of something basic, but thought I would throw it out there.

strikethree

My value credentials are nothing special, but in general, earnings yield trumps dividend yield, unless you suspect substantial earnings manipulation (in which case the dividend yield has the advantage of actually being paid). Ultimately it's the earnings power of the company that matters (and how that compares to business and financial risk). Whether it's paid now as a dividend or held for later as retained earnings matters, but is typically a second-order issue.

In a recession, however, dividend-paying companies are often seen as better able to withstand revenue contractions, because dividend payers are generally more mature, almost utility-like companies, and the dividend might be seen as an extra "cushion" before assets actually get eroded. Basically, dividends may be an indicator of lower risk. Given two companies with the same earnings yield, the one with the higher dividend yield is probably safer. This doesn't consider the opportunities of growth from reinvestment of retained earnings, but in a recession, growth is generally more difficult to achieve.



Edited 1 time(s). Last edit at Thursday, May 5, 2011 at 10:32AM by bchadwick.

Dapper425

Unless it's a REIT (or some other structure where earnings and dividend are substantially the same), then dividend yield is irrelevant, per M&M. Profitability (here, proxied by earnings) is important.

Kapie

They're not mutually exclusive, but if you're asking "high earnings yield but low dividend yield" vs "low earnings yield but high dividend yield" then the tie breaker is ROIC.

If ROIC is high and sustainable, I'd prefer high earnings yield but low div. yield.

yospaghetti

EDIT: Answered the wrong question. Thought you said "dividends or reinvested in the business" type question. Unffff, I need coffee.

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Edited 1 time(s). Last edit at Thursday, May 5, 2011 at 08:22AM by supersadface.