Skip to main content Accessibility help

Payout Yields and Stock Return Predictability: How Important Is the Measure of Cash Flow?

  • Gregory W. Eaton and Bradley S. Paye


We compare the stock return forecasting performance of alternative payout yields. The net payout yield produces more accurate forecasts relative to alternatives, including the traditional dividend yield. This remains true even after excluding several years during the Great Depression when issuance was unusually high. The measure of cash flow used to form the yield matters economically. Long-term investors’ hedging demand for stock is considerably reduced when net payout, rather than dividends, serves as the cash-flow measure. An agent relying on an incorrect payout measure is willing to pay an economically significant “management fee” to switch to the optimal policy.


Corresponding author

* Eaton,, Spears School of Business, Oklahoma State University; Paye (corresponding author),, Pamplin College of Business, Virginia Polytechnic Institute and State University.


Hide All

We thank Jacob Boudoukh, Alexander Butler, John Campbell, Indraneel Chakraborty, Jakub Jurek, Andrew MacKinlay, Paulo Maio (Financial Management Association (FMA) discussant), Paul Malatesta (the editor), Roni Michaely (the referee), Thomas Quistgaard Pedersen, James Weston, and conference and seminar participants at Rice University, Southern Methodist University, the University of Georgia, and the 2014 FMA Annual Meetings for helpful comments. Jakub Jurek and Luis Viceira generously furnished MATLAB code for computing optimal portfolios using results from Jurek and Viceira (2011). Paye acknowledges support from the Center for Research in Econometric Analysis of Time Series (CREATES) (DNRF78), funded by the Danish National Research Foundation, as well as a 2013 summer research grant from the University of Georgia. Previous versions of this article circulated under the alternative titles “Net Cash Disbursements to Equity Holders: Implications for Stock Return Predictability and Long-Horizon Consumption and Portfolio Decisions” and “Predictable Variation in Stock Returns and Cash Flow Growth: What Role Does Issuance Play?”



Hide All
Ackert, L. F., and Smith, B. F.. “Stock Price Volatility, Ordinary Dividends, and Other Cash Flows to Shareholders.” Journal of Finance, 48 (1993), 11471160.
Allen, F., and Michaely, R.. “Payout Policy.” In Handbook of the Economics of Finance, Vol. 1, Constantinides, G. M., Harris, M., and Stulz, R. M., eds. Amsterdam, Netherlands: Elsevier, North-Holland (2003).
Amihud, Y., and Hurvich, C. M.. “Predictive Regressions: A Reduced-Bias Estimation Method.” Journal of Financial and Quantitative Analysis, 39 (2004), 813841.
Amihud, Y.; Hurvich, C. M.; and Wang, Y.. “Multiple-Predictor Regressions: Hypothesis Testing.” Review of Financial Studies, 22 (2009), 413434.
Ang, A.Predicting Dividends in Log-Linear Present Value Models.” Pacific-Basin Finance Journal, 20 (2012), 151171.
Baker, M., and Wurgler, J.. “The Equity Share in New Issues and Aggregate Stock Returns.” Journal of Finance, 55 (2000), 22192257.
Bansal, R., and Yaron, A.. “The Asset Pricing-Macro Nexus and Return-Cash Flow Predictability.” Working Paper, Duke University (2007).
Barberis, N.Investing for the Long Run When Returns Are Predictable.” Journal of Finance, 55 (2000), 225264.
Boudoukh, J.; Michaely, R.; Richardson, M.; and Roberts, M. R.. “On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing.” Journal of Finance, 62 (2007), 877915.
Brav, A.; Graham, J. R.; Harvey, C. R.; and Michaely, R.. “Payout Policy in the 21st Century.” Journal of Financial Economics, 77 (2005), 483527.
Butler, A. W.; Cornaggia, J.; Grullon, G.; and Weston, J. P.. “Corporate Financing Decisions, Managerial Market Timing, and Real Investment.” Journal of Financial Economics, 101 (2011), 666683.
Butler, A. W.; Grullon, G.; and Weston, J. P.. “Can Managers Forecast Aggregate Market Returns?Journal of Finance, 60 (2005), 963986.
Campbell, J. Y., and Ammer, J.. “What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns.” Journal of Finance, 48 (1993), 337.
Campbell, J. Y.; Chan, Y. L.; and Viceira, L. M.. “A Multivariate Model of Strategic Asset Allocation.” Journal of Financial Economics, 67 (2003), 4180.
Campbell, J. Y., and Shiller, R. J.. “The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors.” Review of Financial Studies, 1 (1988a), 195228.
Campbell, J. Y., and Shiller, R. J.. “Stock Prices, Earnings, and Expected Dividends.” Journal of Finance, 43 (1988b), 661676.
Campbell, J. Y., and Thompson, S. B.. “Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?Review of Financial Studies, 21 (2008), 15091531.
Campbell, J. Y., and Viceira, L. M.. “Consumption and Portfolio Decisions When Expected Returns Are Time Varying.” Quarterly Journal of Economics, 114 (1999), 433495.
Campbell, J. Y., and Yogo, M.. “Efficient Tests of Stock Return Predictability.” Journal of Financial Economics, 81 (2006), 2760.
Chen, L.On the Reversal of Return and Dividend Growth Predictability: A Tale of Two Periods.” Journal of Financial Economics, 92 (2009), 128151.
Clark, T. E., and McCracken, M. W.. “Testing for Unconditional Predictive Ability.” In Oxford Handbook on Economic Forecasting, Vol. 1, Clements, M. P. and Hendry, D. F., eds. Oxford, UK: Oxford University Press (2011).
Clark, T. E., and West, K. D.. “Approximately Normal Tests for Equal Predictive Accuracy in Nested Models.” Journal of Econometrics, 138 (2007), 291311.
Cochrane, J. H.Volatility Tests and Efficient Markets.” Journal of Monetary Economics, 27 (1991), 463485.
Cochrane, J. H.Explaining the Variance of Price–Dividend Ratios.” Review of Financial Studies, 5 (1992), 243280.
Cochrane, J. H.Permanent and Transitory Components of GNP and Stock Prices.” Quarterly Journal of Economics, 109 (1994), 241265.
Cochrane, J. H.The Dog That Did Not Bark: A Defense of Return Predictability.” Review of Financial Studies, 21 (2008), 15331575.
Cochrane, J. H.Presidential Address: Discount Rates.” Journal of Finance, 66 (2011), 10471108.
Engsted, T., and Pedersen, T. Q.. “The Dividend–Price Ratio Does Predict Dividend Growth: International Evidence.” Journal of Empirical Finance, 17 (2010), 585605.
Fama, E. F., and French, K. R.. “Dividend Yields and Expected Stock Returns.” Journal of Financial Economics, 22 (1988), 325.
Fama, E. F., and French, K. R.. “Business Conditions and Expected Returns on Stocks and Bonds.” Journal of Financial Economics, 25 (1989), 2349.
Fama, E. F., and French, K. R.. “Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?Journal of Financial Economics, 60 (2001), 343.
Farre-Mensa, J.; Michaely, R.; and Schmalz, M.. “Payout Policy.” Annual Review of Financial Economics, 6 (2014), 75134.
Giacomini, R., and White, H.. “Tests of Conditional Predictive Ability.” Econometrica, 74 (2006), 15451578.
Goetzmann, W. N., and Jorion, P.. “Testing the Predictive Power of Dividend Yields.” Journal of Finance, 48 (1993), 663679.
Goyal, A., and Welch, I.. “A Comprehensive Look at the Empirical Performance of the Equity Premium Prediction.” Review of Financial Studies, 21 (2008), 14551508.
Grullon, G., and Michaely, R.. “Dividends, Share Repurchases, and the Substitution Hypothesis.” Journal of Finance, 57 (2002), 16491684.
Grullon, G.; Paye, B.; Underwood, S.; and Weston, J. P.. “Has the Propensity to Pay Out Declined?Journal of Financial and Quantitative Analysis, 46 (2011), 124.
Johannes, M.; Kortweg, A.; and Polson, N.. “Sequential Learning, Predictability, and Optimal Portfolio Returns.” Journal of Finance, 69 (2014), 611644.
Jurek, J. W., and Viceira, L. M.. “Optimal Value and Growth Tilts in Long-Horizon Portfolios.” Review of Finance, 15 (2011), 2974.
Keim, D. B., and Stambaugh, R. F.. “Predicting Returns in the Stock and Bond Markets.” Journal of Financial Economics, 17 (1986), 357390.
Kim, C. J., and Park, C.. “Disappearing Dividends: Implications for the Dividend–Price Ratio and Return Predictability.” Journal of Money, Credit and Banking, 45 (2013), 933952.
Larrain, B., and Yogo, M.. “Does Firm Value Move Too Much to Be Justified by Subsequent Changes in Cash Flow?Journal of Financial Economics, 87 (2008), 200226.
Merton, R. C.Lifetime Portfolio Choice under Uncertainty: The Continuous Time Case.” Review of Economics and Statistics, 51 (1969), 247257.
Merton, R. C.Optimum Consumption and Portfolio Rules in a Continuous-Time Model.” Journal of Economic Theory, 3 (1971), 373413.
Merton, R. C.An Intertemporal Capital Asset Pricing Model.” Econometrica, 41 (1973), 867887.
Nelson, C. R., and Kim, M. J.. “Predictable Stock Returns: The Role of Small Sample Bias.” Journal of Finance, 48 (1993), 641661.
Newey, W. K., and West, K. D.. “A Simple Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703708.
Robertson, D., and Wright, S.. “Dividends, Total Cash Flow to Shareholders, and Predictive Return Regressions.” Review of Economics and Statistics, 88 (2006), 9199.
Rozeff, M.Dividend Yields Are Equity Risk Premiums.” Journal of Portfolio Management, 11 (1984), 6875.
Shiller, R. J.Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?American Economic Review, 71 (1981), 421436.
Shiller, R. J.Stock Prices and Social Dynamics.” Brookings Papers on Economic Activity, 2 (1984), 457510.
Skinner, D. J.The Evolving Relation between Earnings, Dividends, and Stock Repurchases.” Journal of Financial Economics, 87 (2008), 582609.
Stambaugh, R. F.Predictive Regressions.” Journal of Financial Economics, 54 (1999), 375421.
Stephens, C. P., and Weisbach, M. S.. “Actual Share Reacquisitions in Open-Market Repurchase Programs.” Journal of Finance, 53 (1998), 313333.
van Binsbergen, J. H., and Koijen, R. S. J.. “Predictive Regressions: A Present Value Approach.” Journal of Finance, 65 (2010), 14391471.
Wachter, J. A., and Warusawitharana, M.. “Predictable Returns and Asset Allocation: Should a Skeptical Investor Time the Market?Journal of Econometrics, 148 (2009), 162178.
Wachter, J. A., and Warusawitharana, M.. “What Is the Chance That the Equity Premium Varies over Time? Evidence from Regressions on the Dividend-Price Ratio.” Journal of Econometrics, 186 (2015), 7493.


Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed