Dividend Yields, Dividend Growth, and Return Predictability in the Cross-Section of Stocks
Paulo F. Maio
Hanken School of Economics
New University of Lisbon - Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
April 28, 2013
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
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
Date posted: October 8, 2012 ; Last revised: April 28, 2013
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