Option implied dividends and the market risk premium

We propose a new method for computing a lower bound to the expected future dividend component of the market risk premium from observed option prices. We find that our estimate of future dividend yields has similar characteristics to future realized dividend yields, exhibits significant volatility and is a strong predictor of the realized dividend yield. We demonstrate that the dividend yield term structure is downward sloping and dividend yields constitute around 27% of the total market risk premium in the US. Our findings indicate that dividend yields are an important component of the total US market risk premium.