Abstract

This study investigates the role of dividend yield as a predictor of equity premia in the Indian equity market across periods of market volatility and stability. It contributes to the broader understanding of the challenges associated with using dividend yield as a forecasting tool in an emerging market contextand highlights the limitations of relying solely onfundamental indicators. Using a simplified Fama-French framework, the research analyzes a subset of NIFTY 50 stocks that were part of the index before 2013, selected based on their longevity and consistent dividend payment history, encompassing three volatile and three non-volatile phases from 2008 to 2022. The findings reveal that dividend yield exhibits limited and statistically insignificant predictive power across all periods. Out-of-sample analyses further confirm the model’s poor forecasting performance, with large divergences between actual and predicted equity premia and negative Prediction R-squared values. Additional robustness checks were performed by incorporating sectoral indices and firm size. While sectoral effects only marginally improved explanatory power, the inclusion of firm size significantly increased R-squared in certain phases, particularly during COVID and Post-COVID, though dividend yield itself remained insignificant. The study acknowledges its limitations and offers directions for future research, including the incorporation of macroeconomic variables, the examination of sector-specific dynamics, and the use of advanced predictive modeling techniques to improve return forecasts in emerging markets.