Dividends, Total Cash Flow to Shareholders, and Predictive Return Regressions

This paper provides new evidence on the predictive power of dividend yields for US aggregate stock returns. Following Miller & Modigliani (1961), we construct a measure of the dividend yield that includes all cashflows to shareholders. We show that this alternative “cashflow yield ” has strong and stable predictive power for returns, and appears robust to a battery of tests that have been proposed in recent critiques of the predictability literature. JEL Classifications: C32, C53, E44, G10, G14. ∗We are grateful to the editor and two anonymous referees for helpful comments; also to Nellie Liang of the Division of Research and Statistics at the Federal Reserve Board and Kenneth Petrick of the Bureau of Economic Analysis for advice on data. 1