Dividend Yield and Future Stock Returns in the Swedish Equity Market

Abstract

This thesis examines whether dividend yield predicts future stock returns in the Swedish equity market and whether this relationship differs across interest-rate environments. Using an unbalanced panel of Swedish non-financial firms listed on Nasdaq Stockholm between 01-01-2000 and 31-03-2026, the study applies Fama-MacBeth regression analysis with Newey-West corrected standard errors. The analysis examines whether dividend yield predicts one-month-ahead excess returns after controlling for size, book-to-market, and momentum. The results indicate a positive and statistically significant relationship between dividend yield and future excess returns. Firms with higher dividend yields earn higher subsequent returns, contrary to the negative relationship predicted by Hartzmark and Solomon's (2019) dividend-disconnect framework. Furthermore, the analysis finds no evidence that this relationship becomes stronger during periods of low or negative interest rates, despite Hartzmark and Solomon's (2019) argument that demand for dividend-paying stocks should be particularly strong when alternative income-generating assets offer lower yields. Overall, the findings are inconsistent with the dividend-disconnect hypothesis and instead support a valuation-based interpretation, in which higher dividend yields reflect lower relative valuations and therefore higher expected future returns in the Swedish equity market.