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

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  • Maio, Paulo
  • Santa-Clara, Pedro

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.

Suggested Citation

  • Maio, Paulo & Santa-Clara, Pedro, 2015. "Dividend Yields, Dividend Growth, and Return Predictability in the Cross Section of Stocks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(1-2), pages 33-60, April.
    • Handle: RePEc:cup:jfinqa:v:50:y:2015:i:1-2:p:33-60_00
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    Cited by:

    1. Lan, Chunhua & Doan, Bao, 2022. "Stock price movements: Evidence from global equity markets," Journal of Empirical Finance, Elsevier, vol. 69(C), pages 123-143.
    2. Shi, Jinyan & Yu, Conghui & Liu, Xiangkun & Li, Yanxi, 2020. "Predicting firm stock returns with customer stock returns: Moderating effects of customer characteristics," Research in International Business and Finance, Elsevier, vol. 54(C).
    3. Maio, Paulo, 2016. "Cross-sectional return dispersion and the equity premium," Journal of Financial Markets, Elsevier, vol. 29(C), pages 87-109.
    4. Pham, Quynh Thi Thuy, 2021. "Stock Return Predictability: Evidence Across US Industries," Finance Research Letters, Elsevier, vol. 38(C).
    5. Davide Pettenuzzo & Riccardo Sabbatucci & Allan Timmermann, 2020. "Cash Flow News and Stock Price Dynamics," Journal of Finance, American Finance Association, vol. 75(4), pages 2221-2270, August.
    6. Kragt, Jac, 2018. "This time it's dividend," Other publications TiSEM 8959787b-5bef-40bd-ae17-9, Tilburg University, School of Economics and Management.
    7. Tetsuya Adachi & Takashi Asano & Tatsushi Okuda, 2016. "Simultaneous Estimation of Cost of Equity and Expected Earnings of Individual Firms with the Residual Income Model," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 34, pages 1-38, November.
    8. Ricardo De la O & Sean Myers, 2018. "Subjective Cash Flows and Discount Rates," 2018 Meeting Papers 291, Society for Economic Dynamics.
    9. Ahmad, Khurshid & Han, JingGuang & Hutson, Elaine & Kearney, Colm & Liu, Sha, 2016. "Media-expressed negative tone and firm-level stock returns," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 152-172.
    10. Yu, Deshui & Huang, Difang & Chen, Li, 2023. "Stock return predictability and cyclical movements in valuation ratios," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 36-53.
    11. Malamud, Semyon & Vilkov, Grigory, 2018. "Non-myopic betas," Journal of Financial Economics, Elsevier, vol. 129(2), pages 357-381.
    12. Stivers, Adam, 2018. "Equity premium predictions with many predictors: A risk-based explanation of the size and value factors," Journal of Empirical Finance, Elsevier, vol. 45(C), pages 126-140.
    13. Maio, Paulo & Xu, Danielle, 2020. "Cash-flow or return predictability at long horizons? The case of earnings yield," Journal of Empirical Finance, Elsevier, vol. 59(C), pages 172-192.
    14. Chava, Sudheer & Gallmeyer, Michael & Park, Heungju, 2015. "Credit conditions and stock return predictability," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 117-132.
    15. Jiang, Fuxiu & Cai, Xinni & Jiang, Zhan & Nofsinger, John R., 2019. "Multiple large shareholders and dividends: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    16. Yun, Jaeho, 2020. "A re-examination of the predictability of stock returns and cash flows via the decomposition of VIX," Economics Letters, Elsevier, vol. 186(C).
    17. Marie-Hélène Gagnon & Gabriel Power & Dominique Toupin, 2018. "Forecasting International Index Returns using Option-implied Variables," Cahiers de recherche 1807, Centre de recherche sur les risques, les enjeux économiques, et les politiques publiques.
    18. Møller, Stig V. & Sander, Magnus, 2017. "Dividends, earnings, and predictability," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 153-163.
    19. Davide Pettenuzzo & Riccardo Sabbatucci & Allan Timmermann, 2018. "High-frequency Cash Flow Dynamics," Working Papers 120, Brandeis University, Department of Economics and International Business School.
    20. Golez, Benjamin & Koudijs, Peter, 2018. "Four centuries of return predictability," Journal of Financial Economics, Elsevier, vol. 127(2), pages 248-263.
    21. Yu, Deshui & Huang, Difang & Chen, Li & Li, Luyang, 2023. "Forecasting dividend growth: The role of adjusted earnings yield," Economic Modelling, Elsevier, vol. 120(C).

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