Returns of Dividend vs. Non-Dividend-Paying Stocks and Their Relations With Financial Distress and Market Risk Measures

Abstract

This study investigates whether risks and returns of dividend-paying stocks differ from non-dividend-paying stocks. It also examines the financial health and market risk exposure of dividend vs. non-dividend paying firms. The descriptive statistics show that average risks and return of non-dividend paying stocks are higher than dividend-paying stocks. However, tests of equality of means and variances fail to support the conventional view that dividend paying stocks’ returns and risks differ from non-dividend paying stocks over time. The Altman financial stress test shows that the average Z-score of non-dividend-paying stocks is higher and is more volatile than non-dividend paying firms. However, the results strongly reject the argument that dividend and non-dividend paying firms are equally exposed to financial risks. Furthermore, the tests of equality of mean and variance of market risk of dividend paying vs. non-dividend paying stocks are strongly rejected.