NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
loading...

Growth Expectations, Dividend Yields, and Future Stock Returns

Zhi Da, Ravi Jagannathan, Jianfeng Shen

NBER Working Paper No. 20651
Issued in October 2014
NBER Program(s):Asset Pricing

According to the dynamic version of the Gordon growth model, the long-run expected return on stocks, stock yield, is the sum of the dividend yield on stocks plus some weighted average of expected future growth rates in dividends. We construct a measure of stock yield based on sell-side analysts' near-term earnings forecasts that predicts US stock index returns well, with an out-of-sample R-squared that is consistently above 2% at monthly frequency over our sample period. Stock yield also predicts future stock index returns in the US and other G7 countries and returns of US stock portfolios formed by sorting stocks based on firm characteristics, at various horizons. The findings are consistent with a single dominant factor driving expected returns on stocks over different holding periods. That single factor extracted from the cross section of stock yields using the Kelly and Pruitt (2013) partial regressions method predicts stock index returns better. The performance of the Binsbergen and Koijen (2010) latent factor model for forecasting stock returns improves significantly when stock yield is included as an imperfect observation of expected return on stocks. Consistent with folk wisdom, stock returns are more predictable coming out of a recession. Our measure performs as well in predicting stock returns as the implied cost of capital, another common stock yield measure that uses additional information.

download in pdf format
   (659 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20651

Users who downloaded this paper also downloaded* these:
Jagannathan and Liu w21557 Dividend Dynamics, Learning, and Expected Stock Index Returns
Barro, Fernández-Villaverde, Levintal, and Mollerus w20652 Safe Assets
Hess w0649 Dividend Yields and Stock Returns: A Test for Tax Effects
Campbell and Shiller w2100 The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors
Camous and Cooper w20650 Monetary Policy and Debt Fragility
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us