Operational Considerations in Dividend Forecasting
Data Reliability
Comprehensive coverage of companies’ historical dividend payments, their changing dividend policies such as payout ratios, and stated intentions, as well as their financial reports, are all essential building blocks for dividend forecasting. These data points have historically been most reliable in the US and other developed equity markets. They can be less reliable in some emerging and frontier markets, where more judgement and specialist expertise may be needed to interpret company policies, announcements and financial reports.
Forecasting Methodologies
Forecasting methodologies may need to be tailored to the idiosyncrasies of specific countries and markets. Forecasting approaches can be categorised in at least nine ways across three axes. They can be manual, automated or hybrid. They can employ quantitative or qualitative data or a mix of both. They can also be top down, bottom up or a mix.
Regulatory Compliance
Forecasting methodologies should heed regulations on dividends, which vary between countries, corporate legal systems and accounting standards. For instance, in the UK, dividends can only be paid out of profits available for distribution.
There can be special restrictions on banks’ ability to pay dividends: if the central bank or other regulator of banks, and other financial companies such as insurers, determines that they do not have enough capital to withstand solvency or stress tests, the regulators can dictate cuts in dividends - or even temporarily ban payment of dividends.
In some cases, dividend yields need to be reported to account for withholding taxes. For instance, the 871(m) dividend yield allows for US withholding taxes, which may apply to certain vehicles or end investors or both.
