Expected Returns and Expected Dividend Growth

48 Pages Posted: 5 Apr 2003 Last revised: 1 Oct 2022

See all articles by Martin Lettau

Martin Lettau

University of California - Haas School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Sydney C. Ludvigson

New York University - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: April 2003

Abstract

We investigate a consumption-based present value relation that is a function of future dividend growth. Using data on aggregate consumption and measures of the dividend payments from aggregate wealth, we show that changing forecasts of dividend growth make an important contribution to fluctuations in the U.S. stock market, despite the failure of the dividend-price ratio to uncover such variation. In addition, these dividend forecasts are found to covary with changing forecasts of excess stock returns. The variation in expected dividend growth we uncover is positively correlated with changing forecasts of excess returns and occurs at business cycle frequencies, those ranging from one to six years. Because positively correlated fluctuations in expected dividend growth and expected returns have offsetting affects on the log dividend-price ratio, the results imply that both the market risk-premium and expected dividend growth vary considerably more than what can be revealed using the log dividend-price ratio alone as a predictive variable.

Suggested Citation

Lettau, Martin and Ludvigson, Sydney C., Expected Returns and Expected Dividend Growth (April 2003). NBER Working Paper No. w9605, Available at SSRN: https://ssrn.com/abstract=392992

Martin Lettau (Contact Author)

University of California - Haas School of Business ( email )

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Sydney C. Ludvigson

New York University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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