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

Published online by Cambridge University Press:  08 June 2015

Paulo Maio  and
Pedro Santa-Clara
Paulo Maio*
Affiliation:
paulo.maio@hanken.fi, Hanken School of Economics, Department of Finance and Statistics, Helsinki 00101, Finland
Pedro Santa-Clara
Affiliation:
psc@novasbe.pt, Universidade Nova de Lisboa, Nova School of Business and Economics, Lisboa 1099-032, Portugal, National Bureau of Economic Research, and Center for Economic and Policy Research.
*
*Corresponding author: paulo.maio@hanken.fi
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Abstract

There is a generalized conviction that variation in dividend yields is exclusively related to expected returns and not to expected dividend growth, for example, Cochrane’s (2011) presidential address. 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 the aggregate dividend yield has important heterogeneity in the cross section of equities. Our results are robust to different forecasting horizons, econometric methodology (long-horizon regressions or first-order vector autoregression), and alternative decomposition based on excess returns.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 1-2 , April 2015 , pp. 33 - 60
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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