STOCK RETURNS, DIVIDEND YIELDS, AND TAXES

Using an improved measure of a common stock's annualized dividend yiel d, we document that risk-adjusted NYSE stack returns increase in divid end yield during the period from 1963 to 1994. This relation between r eturn and yield is robust to Various specifications of multifactor ass et pricing models that incorporate the Fama-French factors. The magnit ude of the yield effect is too large to be explained by a ''tax penalt y'' on dividend income and is not explained by previously documented a nomalies. Interestingly, the effect is primarily driven by smaller mar ket capitalization stocks and zero-yield stocks.