Zero Dividend Stocks Are Bad

Let us do alpha-beta analysis (simple linear regression) of zero-dividend stocks upon dividend-paying stocks.

Consider monthly equity premia (total returns, including dividends, minus risk-free returns measured by 3-month Treasury rate). We subtract risk-free returns because this is the benchmark upon which we measure stock returns. Indeed, what good is it to get $6\%$ this year from risky stocks if you could get $8\%$ from risk-free Treasury bonds?

I used Kenneth French data library for stocks and Federal Reserve Economic Data for 3-month Treasury rates. All stock portfolios are equal-weighted.

Let $P(t)$ be the equity premium for zero-dividend stocks and let $Q(t)$ be the equity premium for dividend-paying stocks. Then $P(t) = -0.005 + 1.24Q(t) + e(t)$ , where $e(t)$ are residuals. This implies that excess return $\alpha = -0.005$ for month and so $-0.06 = -6\%$ for a year. And market exposure $\beta = 1.24$ (for a month or a year). The $R^2 = 67.5\%$ . This makes the following financial sense:

When you invest in zero-dividend stocks, you expose yourself to more risk that dividend-paying stocks, since $1.24 > 1$ , but you lose $6\%$ per year. In fact, annualized equity premium for dividend stocks is $8.8\%$ and for zero-dividend stocks is $5\%$ . The annualized standard deviation for dividend stocks is $16\%$ and for zero-dividend stocks is $24\%$ . More risk, less reward!

Many of these zero-dividend stocks are startups. But historically, investing in startups is a recipe for trouble. Although individual IPOs outperform the market (Microsoft, Walmart, Starbucks, Amazon), on average they lag far behind. This is another argument for good old value investing.