Payout Yields and Stock Return Predictability: How Important is the Measure of Cash Flow?

49 Pages Posted: 4 Nov 2013 Last revised: 27 Nov 2017

See all articles by Gregory W. Eaton

Gregory W. Eaton

Oklahoma State University - Stillwater - Department of Finance

Bradley S. Paye

Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law

Date Written: April 10, 2017

Abstract

We compare the stock return forecasting performance of alternative payout yields. The net payout yield produces more accurate forecasts relative to alternatives, including the traditional dividend yield. This remains true even after excluding several years during the Great Depression when issuance was unusually high. The measure of cash flow used to form the yield matters economically. Long-term investors' hedging demand for stock is considerably reduced when net payout, rather than dividends, serves as the cash flow measure. An agent relying on an incorrect payout measure is willing to pay an economically significant "management fee" to switch to the optimal policy.

Keywords: Stock return predictability, dividend yield, net payout yield, stock issuances, stock repurchases, portfolio choice

JEL Classification: G11, G14, G35, C22

Suggested Citation

Eaton, Gregory W. and Paye, Bradley S., Payout Yields and Stock Return Predictability: How Important is the Measure of Cash Flow? (April 10, 2017). Journal of Financial and Quantitative Analysis (JFQA), Vol. 52, No. 4, 2017. Available at SSRN: https://ssrn.com/abstract=2348250 or http://dx.doi.org/10.2139/ssrn.2348250

Gregory W. Eaton

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States

Bradley S. Paye (Contact Author)

Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law ( email )

1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States

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