Dividend Stocks = Growth Stocks?

Most people assume that dividend paying stocks are generally slow growing and are worth more for their dividend than for their stock appreciation. A study published in a 2003 Financial Analysts Journal may show that these assumptions aren't necessarily correct.

SmartMoney magazine has an article about some research done by a pair of money managers. Robert Arnott, former global equity strategist at Solomon Brothers along with Clifford Asness, who runs a hedge fund in Connecticut published the article, "Surprise! Higher Dividends = Higher Earnings Growth". This research took data from the past 130 years, but focused on the past 60 years.

The research showed that the top 25% of S&P 500 stocks as ranked by payout ratio showed better growth than the bottom 25%. They found that the sweet spot for the dividend paying companies showing the most earning growth had a payout ratio between 60% and 80%. They suggest that this growth may be due to the companies not having money to spend on large acquisitions which often stall earning growth. Another possible reason for the high payout ratio may be that management has high confidence in their company.