The Long-Run Drivers of Stock Returns: Total Payouts and the Real Economy

Abstract

We provide theoretical and empirical evidence over 1871–2014 that total payouts (dividends plus buybacks) are the key drivers of long-run stock market returns. We show that total payouts per share (adjusted for the share decrease from buybacks) grew in line with economic productivity, whereas aggregate total payouts grew in line with GDP. We also show that a dividend discount model (DDM) based on current yields and historical growth rates underestimates expected returns relative to the total payout model. Finally, we demonstrate that the cyclically adjusted total yield (CATY) predicts changes in expected returns at least as well as the cyclically adjusted price-to-earnings ratio (CAPE).

Keywords: Portfolio Management, Economic Analysis and Capital Market Expectations, Key Macroeconomic Factors Affecting Asset Returns, Corporate Finance, Dividend Policy: Dividend Theory, Corporate Finance, Dividend Policy, Factors Affecting Dividend Payout Policy Dividend Policy