Analyst target price and dividend forecasts and expected stock returns

Abstract

This paper examines whether adding expected dividend yields implied by analyst dividend forecasts to expected capital gains implied by analyst target prices improves the portfolio strategy of buying stocks with the highest expected returns and selling stocks with the lowest expected returns. We find that the strategy based on the expected total returns performs only slightly better at the 1-month horizon because the short-term return predictability of the expected dividend yield is weak. We find that the strategy generates significant abnormal returns regardless of sorting the stocks universally or within industries, although sorting stocks within industries improves the performance.