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

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.