Dividend Yields, Dividend Growth, and Return Predictability in the Cross-Section of Stocks
Paulo Maio and Pedro Santa-Clara | Nov 2012
There is a generalized conviction that variation in dividend yields is exclusively related to expected returns and not to expected dividend growth — e.g. Cochrane’s presidential address (Cochrane, 2011). We show that this pattern, although valid for the stock market as a whole, is not true for small and value stocks portfolios where dividend yields are related mainly to future dividend changes. Thus, the variance decomposition associated with aggregate dividend yields (commonly used in the literature) has important heterogeneity in the cross-section of equities. Our results are robust for different forecasting horizons, econometric methodology used (direct long-horizon regressions or first-order VAR), and also confirmed by a Monte-Carlo simulation.