Dividend-Price Ratios and Stock Returns: International Evidence

Abstract

A widely replicated result, using U.S. data, is that dividend-price ratios predict future returns, not future dividend growth. As noted by Cochrane (2011) in his Presidential Address to the American Finance Association, this is evidence of stock return predictability contrary to the original interpretation of the efficient market hypothesis. However, Cornell (2012) argues that the evident predictability may be an artifact of the remarkably stable real growth of the American economy. To further investigate this question, this paper examines the relation between dividend yields, future returns and dividend growth using current international data. It is found that in some countries, dividend-price ratios predict future returns, in other countries they predict future dividend growth, and in still other countries a combination of the two. These heterogeneous findings support the interpretation that the relations between the variables depend on historical circumstances.