Demographics and the long-horizon returns of dividend-yield strategies

This paper investigates the relationship between demographic changes and the long-run returns of dividend-yield investment strategies. We hypothesise that in a world where components of wealth are mentally treated as being non-fungible, the preference for high dividend-paying stocks by older investors means that the excess returns of high dividend-yielding stocks, relative to other stocks, should be positively related to demographic clientele variation. In particular, we find that, consistent with the behavioural life-cycle hypothesis, long-run returns of dividend-yield investment strategies are positively driven by changes in the proportion of the older population. Our results are robust when controlled for the Fama–French factors, inflation rate, consumption growth rate, interest rates, tax clienteles, time trend and alternative definitions of both dividend-yield strategies and demographic variation.

► The behavioural life-cycle hypothesis predicts that old individuals prefer to consume out of dividends than capital gains.
► Therefore we hypothesise that the long-horizon returns of dividend-yield strategies should be positively related to demographic clientele variation.
► Empirical tests are performed to support our hypothesis.
► Our results are robust to the inclusion of control variables.