Abstract
This study empirically examines how dividend policy and valuation factors relate to Borsa İstanbul (BIST) returns. It addresses the tension between Miller & Modigliani’s (1961) dividend-irrelevance theorem and evidence that dividend yield predicts future returns (Fama & French, 1988) in an emerging-market context. Over a ~9-year sample, a dividend-yield-plus-quality portfolio and an earnings-yield (E/P) value portfolio are compared to the BIST 100. The dividend+quality portfolio produced steady risk-adjusted returns (Sharpe 1.94).
1. Introduction
Dividend policy is among corporate finance’s most debated topics. Miller & Modigliani (1961) argue it is irrelevant to firm value in perfect markets; but taxes, signaling and behavioral preferences make dividends and yield informative. We ask whether a high-yield, high-quality portfolio earns meaningful risk-adjusted returns versus the index on BIST.
2. Theoretical Framework and Literature
- Dividend irrelevance: Miller & Modigliani (1961).
- Dividend discount model: Gordon (1959) — price as present value of expected dividends.
- Dividend smoothing: Lintner (1956).
- Predictive power: Fama & French (1988) — yields forecast long-horizon returns.
- Value premium: Basu (1977, low P/E) and Fama & French (1992, high book-to-market).
- Quality: Novy-Marx (2013) — profitability explains returns.
3. Data and Methodology
The sample covers liquid BIST equities over ~9 years (2016-01-04–2026-07-23). Two portfolios: (i) dividend+quality, selected on dividend yield and a financial-quality score; (ii) value, selected on earnings yield (E/P = 1 ÷ P/E). Both are equal-weighted, periodically rebalanced, and benchmarked to the BIST 100. Limitations: backtest basis; yields are as of rebalance dates and change over time; simplified costs and dividend withholding tax; nominal returns reflect inflation.
4. Findings
Over the same window the BIST 100 returned 32.9% (trailing 12m). The two valuation-based portfolios:
- Dividend + Quality — Annualized: +25.8% · 5-year: +1099.6% · Sharpe: 1.94 · Max DD: -37.6%
- Value (E/P) — Annualized: +23.2% · 5-year: +1275.6% · Sharpe: 1.44 · Max DD: -49.0%
Highest-yield holdings: AFYON (10.1%), DOAS (7.7%), NTGAZ (7.4%), ENJSA (4.3%), PAGYO (3.1%), GWIND (2.6%) (as of the sample’s rebalance date; yields change over time). The quality filter helps screen out ‘dividend traps’ relative to chasing raw yield.
5. Discussion
Results remind us that MM’s frictionless assumptions relax in reality. Yield alone is not a quality signal — an extreme yield can flag a falling price or unsustainable payout (a ‘dividend trap’). Combining yield with quality (profitability, low leverage) yields a more robust selection, consistent with Novy-Marx (2013). The value portfolio’s more volatile profile reflects the value premium’s cyclicality. In an inflationary regime, dividends form a tangible, cash-based component of real return.
6. Conclusion and Limitations
Dividend yield and valuation are meaningful return-related factors on BIST, but yield becomes more reliable when combined with quality filters. Read cautiously given the backtest basis, simplified tax/cost assumptions and single-period coverage. Not investment advice; past performance does not guarantee future results.
References
- Basu, S. (1977). Journal of Finance, 32(3).
- Fama & French (1988). Journal of Financial Economics, 22(1).
- Fama & French (1992). Journal of Finance, 47(2).
- Gordon, M. J. (1959). Review of Economics and Statistics, 41(2).
- Lintner, J. (1956). American Economic Review, 46(2).
- Miller & Modigliani (1961). Journal of Business, 34(4).
- Novy-Marx, R. (2013). Journal of Financial Economics, 108(1).
