Predicting Dividends in Log-Linear Present Value Models

In a present value model, high dividend yields imply that either future dividend growth must be low, or future discount rates must be high, or both. While previous studies have largely focused on the predictability of future returns from dividend yields, dividend yields also strongly predict future dividends, and the predictability of dividend growth is much stronger than the predictability of returns at a one-year horizon. Inference from annual regressions over the 1927-2000 sample imputes over 85% of the variation of log dividend yields to variations in dividend growth. Point estimates of the predictability of both dividend growth and discount rates is stronger when the 1990-2000 decade is omitted.