Dividend Predictability Around the World

The common perception in the literature, mainly based on U.S. data, is that current dividend yields are uninformative about future dividends. We show that this nding changes substantially when looking at a broad international panel of countries, as aggregate dividend growth rates are found to be highly predictable by the dividend yield in medium-sized and smaller countries, but generally not in larger countries. We also show that dividend predictability is weaker in countries where the typical rm is larger and idiosyncratic dividend growth and return volatilities are lower. We nd that the reason why dividends in countries with large andmore stable rms are more dicult to predict is that these types of rms smooth their dividendmore, and dividend smoothing disconnects movements in future dividends from dividend yield fluctuations making dividends dicult to predict. We nally show that in countries where the quality of institutions is high, dividend predictability is weaker. These ndings indicate that the apparent lack of dividend predictability in the U.S. does not, in general, extend to other countries. Rather, dividend predictability is driven by cross-country dierences in rm characteristics, dividend smoothing, and institutions.