Characterizing the Ability of Dividend Yields to Predict Future Dividends in Log-Linear Present Value Models

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 focused on the predictability of expected returns from dividend yields, dividend yields also strongly predict future dividends, and the predictability of dividend growth is much stronger than discount rates returns at a 1-year horizon. Inference from annual regressions imputes over 85% of the variation of log dividend yields to variations in dividend growth, and this attribution is highly significant with robust standard errors. Point estimates of the predictability of both dividend growth and discount rates is stronger when the 1990-2000 decade is omitted.