The dividend–price ratio does predict dividend growth: International evidence

Abstract

Unpredictable dividend growth by the dividend-price ratio is considered a 'stylized fact' in post war US data. Using long-term annual data from the US and three European countries, we revisit this stylized fact, and we also report results on return predictability. We make two main contributions. First, we document that for the US, results for long-horizon predictability are crucially dependent on whether returns and dividend growth are measured in nominal or real terms, and this difference is due to long-term inflation being strongly negatively predictable by the dividend-price ratio. The impact of inflation is to reinforce real return predictability and to reduce -or change direction of -real dividend growth predictability. This provides an explanation for the strong predictability of long-horizon real returns in the 'right' direction, and the strong predictability of long-horizon real dividend growth in the 'wrong' direction, that we see in US post war data. Second, we find that predictability patterns in three European stock markets are in many ways different from what characterize the US stock market. In particular, in Sweden and Denmark dividend growth is strongly predictable by the dividend-price ratio in the 'right' direction while returns are not predictable. The results for the UK are mixed. Our results are robust to a number of changes in the modeling framework. We discuss the results for dividend growth predictability in terms of the 'dividend smoothing hypothesis'.

What news drive variation in Swiss and US bond and stock excess returns?

“…Van Binswangen and Koijen (2010) use filtering techniques to highlight that dividend growth is predictable by the dividendprice ratio in the US also in the more recent past. In addition, Engsted and Pedersen (2010) provide evidence for dividend growth predictability in Denmark and Sweden. Rangvid, Schmeling and Schrimpf (2013) regard a larger cross-section of countries to show that dividend-price ratios of small countries, e.g.…”

Forecasting Returns: New European Evidence

“…The literature has concluded that in-sample (INS) return predictability is primarily found in the UK and US (Rapach and Wohar, 2009;Engsted and Pedersen, 2010), in developed countries (Hjalmarsson, 2010), or in the largest countries (Rangvid, Schmeling, and Schrimpf, 2011). However, only Rangvid, Schmeling and Schrimpf (2011) formally test the link between country characteristics and INS predictability.…”

Disappearing Money Illusion

“…These results are consistent with positive in ‡ation predictability over the period 1871-1976 as shown in Table 1. 6 We believe that these di¤erences between nominal and real return and dividend growth predictability due to in ‡ation predictability are not generally acknowledged, although emphasized by Engsted and Pedersen (2010). Whether to interpret the empirical results as evidence of predictability or unpredictability of returns and dividend growth by the price-dividend ratio naturally hinges on the underlying economic 5 According to (3) it should be future long-horizon discounted in ‡ation, returns, and dividend growth (where the discount factor is ) that are related to pd t .…”