EDHECinfra Paper
Dividend Growth & Return Predictability: A Dynamic Approach

Dividend yields are a determinant of asset prices, but changes in dividend growth impact both dividend yields and discount rates. As a result, dividend growth is typically treated as a known constant in most of the literature.

In this paper, we develop a dynamic approach to forecasting dividend growth using Bayesian filtering techniques, which improves markedly on standard linear methods. The resulting growth-adjusted dividend yield improves out-of-sample return predictions by several orders of magnitude. These results show that dynamic cash flow modeling can significantly improve the performance of expected return models.

EDHEC Infrastructure Institute Publication
2017 (January)