Predictive ability of earnings and dividend yield: an empirical evaluation of New Zealand stocks

Abstract

A number of recent studies in the USA have shown that in the long term, dividend yields are able to explain the stock returns to some extent. Earnings yield has also been often used by practitioners to forecast stock returns. The present paper examines the predictability of stock returns in the New Zealand stock market utilizing the three-month lagged dividend yield and earnings yield models. The study finds that both the three-month lagged dividend and earnings yield models have indeed some predictive power. Neither the regression nor the t-test used in the study reject the null that the models have some explanatory power.