Earnings Yield, Smoothing Adjustment, and Dividend Dynamics

51 Pages Posted: 16 Feb 2021 Last revised: 7 Apr 2021

See all articles by Deshui Yu

Deshui Yu

College of Finance and Statistics, Hunan University

Difang Huang

Monash University

Li Chen

WISE and School of Economics, Xiamen University

Date Written: February 10, 2021

Abstract

We decompose earnings yield into a smoothing component and a stationary residual component to isolate the fluctuations due to variation in expected returns from those due to the change in the forecast of dividend dynamics. The residual component forms a powerful predictor of dividend growth motivated by linking the dividend partial adjustment model to the present-value framework. Empirically, the proposed predictor displays statistically significant in-sample and out-of-sample predictive power for aggregate dividend growth at monthly and annual frequencies, robust in dividend reinvestment strategies, in pre- and post-war data, in good and bad times, and at short and long horizons.

Keywords: Cash flow, dividend smoothing, present-value model, out-of-sample forecasting

JEL Classification: G12, G17, C32, C53

Suggested Citation

Yu, Deshui and Huang, Difang and Chen, Li, Earnings Yield, Smoothing Adjustment, and Dividend Dynamics (February 10, 2021). Available at SSRN: https://ssrn.com/abstract=3783056 or http://dx.doi.org/10.2139/ssrn.3783056

Deshui Yu (Contact Author)

College of Finance and Statistics, Hunan University ( email )

2 Lushan South Rd
Changsha, CA Hunan 410082
China

Difang Huang

Monash University ( email )

900 Dandenong Road
Caulfield East
Melbourne, Victoria 3145
Australia

HOME PAGE: http://difang-huang.github.io

Li Chen

WISE and School of Economics, Xiamen University ( email )

Xiamen, Fujian 361005
China

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