Dividend yield, dividend payers and cross-sectional return prediction

Authors

Seong Jin Ahn, College of Business, Korea Advanced Institute of Science and Technology (KAIST)Follow
Charles (Chad) Ham, Indiana University - Kelley School of BusinessFollow
Zachary Kaplan, Washington University in St. Louis - John M. Olin Business SchoolFollow
Todd T. Milbourn, Southern Methodist University (SMU) - SMU Cox School of BusinessFollow

Publication Date

11-12-2024

Abstract

We provide evidence that dividend yield better predicts returns among dividend payers than alternative pricing factors, contradicting prior research. First, we calculate dividend yield using only the most recent declaration date, substantially increasing return predictability relative to the trailing yield. Second, asset pricing strategies tend to earn low returns within the mature, profitable firms that pay dividends. Cross-sectional tests suggest dividend yield predicts returns because investors value receiving the dividend, rather than it providing information about future earnings. We conclude that dividend yield is a useful valuation metric for mature and easier-to-value firms that tend to pay dividends.

Document Type

Article

Keywords

dividends, information environment, signaling

Disciplines

Finance

DOI

10.2139/ssrn.4641642

Source

SMU Cox: Finance (Topic)

Language

English