Dividend yields have been widely used in previous research to relate stock market valuations to cash flow fundamentals. However, this approach relies on the assumption that dividend yields are stationary. Due to the failure to reject the hypothesis of a unit root in the classical dividend-price...

We show that log-dividends (d) and log-prices (p) are cointegrated, but, instead of de facto assuming the stationarity of the classical log dividend–price ratio, we allow the data to reveal the cointegration vector between d and p. We define the modified dividend–price ratio (mdp), as the...