It is obvious from the top part of figure 5.1 that the dividend/price ratio has
done a poor job as a forecaster of future dividend growth to the date when
the ratio is again borne back to its mean value. The regression line is nearly
horizontal, implying that the forecast for future dividend growth is almost
the same regardless of the dividend/price ratio. The R^2 statistic for the regres-
sion is 0.25 percent, indicating that only one-quarter of one percent of the
variation of dividend growth is explained by the initial dividend/price ratio.
176 CAMPBELL AND SHILLER
Figure 5.1. Dividend growth till the next time D/P crosses its mean. Price growth till
the next time D/P crosses its mean.