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

The Review of Economics and Statistics 2006 88(1), 91-99 open access
This paper provides new evidence on the predictive power of dividend yields for U.S. aggregate stock returns. Following Miller and Modigliani, we construct a measure of the dividend yield that includes all cash flows to shareholders. We show that this alternative cash-flow 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.