Dividend Predictability Around the World

Abstract

The common perception in the literature, mainly based on U.S. data, is that current dividend yields are uninformative about future dividends. We show that this finding changes substantially when looking at a broad international panel of countries, as aggregate dividend growth rates are found to be highly predictable by the dividend yield in medium-sized and smaller countries, but generally not in larger countries. We also show that dividend predictability is weaker in countries where the typical firm is larger and idiosyncratic dividend growth and return volatilities are lower. We find that the reason why dividends in countries with large and more stable firms are more difficult to predict is that these types of firms smooth their dividend more, and dividend smoothing disconnects movements in future dividends from dividend yield fluctuations making dividends difficult to predict. We finally show that in countries where the quality of institutions is high, dividend predictability is weaker. These findings indicate that the apparent lack of dividend predictability in the U.S. does not, in general, extend to other countries. Rather, dividend predictability is driven by cross-country differences in firm characteristics, dividend smoothing, and institutions.