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

46 Pages Posted: 8 Oct 2012 Last revised: 2 Apr 2015

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Pedro Santa-Clara

New University of Lisbon - Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: December 27, 2014

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.

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

Suggested Citation

Maio, Paulo F. and Santa-Clara, Pedro, Dividend Yields, Dividend Growth, and Return Predictability in the Cross-Section of Stocks (December 27, 2014). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2158406 or http://dx.doi.org/10.2139/ssrn.2158406

Paulo F. Maio (Contact Author)

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

Pedro Santa-Clara

New University of Lisbon - Nova School of Business and Economics ( email )

Lisbon
Portugal

HOME PAGE: http://docentes.fe.unl.pt/~psc/

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Centre for Economic Policy Research (CEPR) ( email )

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London, EC1V 3PZ
United Kingdom

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