A Model-Free Term Structure of U.S. Dividend Premiums

Abstract

We construct a model-free term structure of dividend risk premiums from option prices and aggregate analyst forecasts. Applying the method to 2004-2017 U.S. data, we find it is hump-shaped. Its level increases in business cycle contractions and decreases during expansions. The on average negative dividend term premium steepens in contractions and flattens in expansions, driven by strong variations in short-horizon dividend premiums. Buying the next year of S&P 500 dividends whenever the one-year dividend risk premium is positive has earned twice the Sharpe ratio of the index.