Expected Returns and Expected Dividend Growth

Martin Lettau and Sydney Ludvigson

No 9605, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G10 G12 (search for similar items in EconPapers)
Date: 2003-04
New Economics Papers: this item is included in nep-cfn and nep-fin
Note: AP
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Citations: View citations in EconPapers (26)

Published as Lettau, Martin & Ludvigson, Sydney C., 2005. "Expected returns and expected dividend growth," Journal of Financial Economics, Elsevier, vol. 76(3), pages 583-626, June.

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Journal Article: Expected returns and expected dividend growth (2005)
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