Companies that pay regular dividends experience less stock price volatility compared to companies that prioritize growth through acquisitions or reinvest all profits

Abstract

This dissertation examines whether companies that pay consistent dividends exhibit lower stock price volatility than companies that reinvest their profits back into the business. To carry out the analysis, I consulted existing literature that covers this topic, focusing on historical stock price movements of both groups. While the literature review helped contextualize the hypothesis in a qualitative way, the topic was reinforced by a quantitative analysis. The qualitative background included some of the most debated theories on dividend policies such as the Bird-in-Hand Theory by Gordon and Lintner (1962), and the Dividend Irrelevance Theory by Miller and Modigliani (1961). Furthermore, the quantitative analysis was made by screening companies that followed certain criteria: European and North American companies, middle-small capitalization public companies and comprised in a time frame of the last five years. To divide the companies into the subcategories, I filtered using tools such as Bloomberg and Koyfin Pro, that allowed to categorize whether a company consistently paid dividends or retained the earnings for reinvestment. These platforms also provided the metrics I was later going to analyze and compare: beta, standard deviation and total return (CAGR). These metrics were chosen because together they offer a complete view of a stock’s risk profile, market sensitivity, and long-term performance, making them very effective and relevant variables to analyze the impact of dividend policy on the stock´s behavior. The findings of the analysis supported most of the literature reviewed, reinforcing the proposed hypothesis. Dividend-paying companies showcased lower volatility in comparison to the non-dividend paying companies. While some values might had been affected by outliers that couldn´t be excluded due to technical limitations, the overall results exposed higher stock price volatility in companies that reinvested the profits back into the company. The main challenges faced were the lack of existing literature on stock price volatility for companies that reinvest their profits into the business instead of paying dividends, the impossibility of downloading all the data from Koyfin Pro to Excel or any other spreadsheet platform, and the limited familiarity with certain advanced features of Bloomberg and Koyfin, which may have restricted the depth of the analysis but did not compromise the reliability or relevance of the analysis carried out. The whole analysis in this dissertation helps to understand how these two strategies can influence stock behavior. It shows that companies that pay dividends usually have more stable stock prices and more consistent returns, which is useful for investors looking for low risk portfolios while having significant returns. For companies, it suggests that choosing whether or not to pay dividends can affect how their stock is perceived in the market and how it performs in the long term. Personally, I believe that future research could look more in depth at companies that don’t pay dividends, as this area still remains quite unexplored.