Abstract
This paper examines the ability of dividend yields to predict expected stock returns in the Colombo Stock Exchange in the 1989-1997 period. The results show that dividend yields predict expected returns reliably in return horizons up to three years, except in monthly returns. The predictable component of returns is about 5% in quarterly returns, about 10% in one- to two-year returns, and about 30% in three-year returns indicating that the predictable variation tends to increase with the return horizon. Dividend yields are able to track expected nominal as well as real returns, both with and without dividends equally well. These results are quite similar to the findings in most other markets, particularly the U.S. market