Forecasting dividend growth: The role of adjusted earnings yield

Deshui Yu, Difang Huang, Li Chen and Luyang Li

Economic Modelling, 2023, vol. 120, issue C

Abstract: This paper revisits the predictability of dividend growth. Motivated by the dividend partial adjustment model, we decompose the earnings yield into smoothing and residual components. The residual component reflects the variations in the forecast of dividend dynamics and thus forms a powerful predictor of dividend growth. Empirically, the proposed predictor shows significant in-sample predictive power for aggregate dividend growth at both monthly and annual frequencies over several forecast horizons. The regression results are robust to dividend reinvestment strategies and economic status. More importantly, the proposed predictor contains significant out-of-sample predictability, outperforming the historical mean benchmark and a list of popularly used financial and macroeconomic predictors in the literature.

Keywords: Cash flow; Dividend smoothing; Present-value model; Out-of-sample forecasting (search for similar items in EconPapers)
JEL-codes: C32 C53 G12 G17 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:120:y:2023:i:c:s0264999322004254

DOI: 10.1016/j.econmod.2022.106188

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