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. This is evidence of stock-return predictability, and is contrary to the original interpretation of the efficient-market hypothesis. The author argues that this pre-dictability may be an artifact of the American economy’s remarkably stable real growth. This article examines the relation between dividend yields, future returns, and dividend growth, using current international data. It concludes that, in some countries, dividend-price ratios predict future returns; in other countries, they predict future dividend growth; and in still other countries, they predict a combination of the two. The variation, furthermore, is related to the volatility of real dividend growth.