On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing

Abstract

There is strong evidence in the literature that dividends and repurchases have been substitutes for each other throughout the 80's and 90's. Asset pricing models that try to relate cash flow distributions to asset prices need to take this into account. We find that while the dividend price ratio process has changed remarkably during the period, the total payout ratio (dividends plus repurchases normalized by price) has changed very little. More importantly, this difference has implications for asset pricing models. The widely documented decline in the predictive power of dividends for excess stock returns in recent periods is vastly overstated. Statistically and economically significant predictability is found at both short and long horizons when total payouts are used instead of dividends. In addition, we provide evidence that payouts have information in the cross-section for expected stock returns, which exceeds that of dividends.