On the Reversal of Return and Dividend Growth Predictability: A Tale of Two Periods
Posted: 28 May 2008
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On the Reversal of Return and Dividend Growth Predictability: A Tale of Two Periods
Date Written: May 2008
Abstract
A disconcerting, albeit generally accepted, finding is that aggregate stock returns are predictable by dividend yield but dividend growth is unpredictable. I show that part of this lack of dividend growth predictability stems from how dividend growth is constructed. I then document a dramatic reversal of predictability in the 134 years during 1872-2005: stock returns are largely unpredictable in the first seven decades, but become predictable in the postwar period; dividend growth is strongly predictable in the prewar years but this predictability disappears in the postwar years. New evidence on the predictability of long-run returns and dividend growth is also documented.
Keywords: Dividend yield, equity return, dividend growth, predictability
JEL Classification: G12, E44
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