Dividend-Price Ratios and Stock Returns:
Another Look at the History

Abstract

A critical question for investors is the extent to which the expected returns on common stock are predictable. One of the prime pieces of evidence supporting the hypothesis that returns are predictable is that regressions of future returns on dividend-price ratios are highly significant, but future dividend growth is unrelated to the ratio. This article presents an alternate interpretation of these regression results that is consistent with the original version of the efficient market hypothesis, which holds that expected returns are unpredictable. The analysis is based on the economic history of the United States. The historical analysis not only provides an alternative interpretation of the regression results, but also highlights the importance of analyzing the specific historical events responsible for generating financial data.