The Dog Has Barked for a Long Time: Dividend Growth Is Predictable

Abstract

The Campbell-Shiller present value identity implies that (i) the dividend-price ratio should forecast returns or dividend growth, and (ii) any other predictor of returns should also forecast dividend growth, and vice versa. Prior literature investigates (i) and finds that dividend growth appears unpredictable based on forecasting regressions with the dividend-price ratio. We investigate (ii) and combine out-of-sample dividend-growth forecasts from 14 individual predictive regressions based on common return predictors. Encompassing and structural break tests show these individual return predictors contribute disparate and unstable univariate forecasts of dividend growth. Combination forecast methods of 14 common return predictors overcome these econometric problems and generate robust out-of sample predictability of dividend growth over the entire post-war period as well as over most sub-periods. The dividend-growth forecasts coupled with the dividend-price ratio also significantly forecast excess returns out-of-sample.