Dividend Yields, Dividend Growth, and Return Predictability in the Cross-Section of Stocks

Abstract:     
There is a generalized conviction that variation in dividend yields is exclusively related to expected returns and not to expected dividend growth - e.g. Cochrane's presidential address (Cochrane (2011)). We show that this pattern, although valid for the aggregate stock market, is not true for portfolios of small and value stocks, where dividend yields are related mainly to future dividend changes. Thus, the variance decomposition associated with aggregate dividend yield has important heterogeneity in the cross-section of equities. Our results are robust to different forecasting horizons, econometric methodology used (long-horizon regressions or first-order VAR), and an alternative decomposition based on excess returns.

Number of Pages in PDF File: 46

Keywords: asset pricing, predictability of stock returns, dividend-growth predictability, long-horizon regressions, dividend yield, VAR implied predictability, present-value model, size premium, value premium, cross-section of stocks

JEL Classification: C22, G1, G14, G17, G35

working papers series