Working Paper: NBER ID: w5671
Authors: Owen Lamont
Abstract: The aggregate dividend payout ratio forecasts aggregate excess returns on both stocks and corporate bonds in post-war US data. Both high corporate profits and high stock prices forecast low excess returns on equities. When the payout ratio is high, expected returns are high. The payout ratio's correlation with business conditions gives it predictive power for returns; it contains information about future stock and bond returns that is not captured by other variables. The payout ratio is useful because it captures the temporary components of earnings. The dynamic relationship between dividends, earnings and stock prices shows that a positive innovation in earnings lowers expected returns in the near future, but raises them thereafter.
Keywords: expected returns; dividend payout ratio; stock market; corporate bonds
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dividend payout ratio (G35) | expected returns (G17) |
| high dividend payout ratio (G35) | high expected returns (G17) |
| payout ratio (G35) | expected returns (G17) |
| positive innovation in earnings (O00) | expected returns (near future) (G17) |
| positive innovation in earnings (O00) | expected returns (thereafter) (G17) |
| dividend yield (G35) | future stock returns (G17) |
| earnings yield (D33) | future returns (G17) |