Imagine you woke up tomorrow morning, the calendar was open at tomorrow's date - but 10 years ago.
What could you do? Earn a lot of money! (and save the world perhaps)
How could you earn that money? Invest in the stock market? Apple hasn't introduced the iPhone yet and Nokia hasn't jumped off a cliff.
Time travellers have an unfair advantage; but like many other travellers; they have new information which people will pay a handsome price for.
Earning money quickly is recompense for flagging to everyone what's valuable and what's not.
Sub-prime real estate is junk.
In contrast, a recently IPO-ed Google is gold.
Now let's return to the conundrum we left last post. Uncertainty makes forecasting dividends hard. We have a bunch of unhelpful unknowns.
What do we know?
We know the current stock price; the cost of delayed or future cash payments (i.e. the interest rate).
What else can we get our hands on?
How about the forward price? Last time we saw that the next dividend payment could be calculated by comparing the current stock price (the value of all future dividends) minus the forward price (the value of future dividend payments excluding the ones paid between now and the future's expiry date).
It's not common to find forward prices for individual stocks, but we can find them for stock indicies in the form of index future prices.
Future prices don't come to us from speculative time travellers; rather on the back of the trillions of dollars traded in them every day. Each trader earning money from the valuable snippets of information they bring to market every day.
The current price is the best available knowledge we have about the future right now.
In our idealised world from the previous post; the next period's dividend is 1 dollar. The difference between the current price of 100 dollars and the 99 dollar forward price.
Let's hypothesis that the next dividend of the S&P 500 is the difference between the current value and the the next future contract's price.
We need to adjust a little for the mismatch between how we value future payments less than current ones (i.e. the interest rate); but other than that we should have the best possible prediction of the next dividends paid by S&P 500 companies.
We will take a look at how well we can predict dividends in our next post!