While high dividends line shareholders' pockets, they are often seen as a portent of declining profits and a falling share price. If the company invested the dividend payments instead and reaped good returns, runs the argument, then future earnings would be higher, which would boost the share price. This is a common view in financial theory. But new research questions the conventional wisdom. A JP Morgan report shows a positive relationship in Asia between the proportion of current earnings paid out as dividends and companies' share prices. 'Our analysis reveals that Asian companies with consistent or rising dividends have outperformed,' says the report by JP Morgan Asian strategist Adrian Mowat. The research also found that over the past 10 years, among the S&P 500 - the stock index for America's largest companies - the higher the proportion of earnings paid out as dividends, the greater the subsequent earnings growth. In Asia, however, companies do not seem to have realised the link between larger dividends and higher share prices. 'Few companies appear to aspire to a policy of steadily rising cash dividends,' Mr Mowat says. 'Only 16 per cent of the companies in our study have met this criterion.' Possible reasons for larger dividends being linked to stronger earnings include high payouts being seen as a signal of management confidence in a firm's prospects, according to research cited in the JP Morgan report. For each extra dollar invested, companies will reap a declining rate of return, which encourages companies to pay out more in dividends. And retained profits can be invested badly by managers more interested in 'empire building' than boosting earnings. The JP Morgan report recommends examining the overall dividend policy rather than just looking for a high payout ratio when looking for a company with potential profit growth. 'Simply looking at a payout ratio for a growth stock is dangerous,' Mr Mowat says. A payout ratio exposes the investor to lower dividends if company earnings slump. 'Committing to a payout ratio is an easy option for management to achieve its target while exposing the investor to a volatile income stream,' he says. 'A policy of steadily growing dividends per share shows a real commitment to service equity capital.' Brokers caution investors against looking solely at dividends when assessing whether to buy a stock. Investors need to also look at where the earnings are coming from to assess whether they will grow in the future. 'Dividends are an important point but ... if the earnings quality of the company is not good then I think it will be hard to maintain a high dividend yield,' says Tung Tai Securities associate director Kenny Tang Sing-hing.