This paper proposes a liquidity-adjusted dividend-ratio model. Motivated by the liquidityadjusted asset pricing theory, we show that (log) stock prices, dividends, and stock liquidity are cointegrated and define their linear combination as liquidity-adjusted price-dividend ratios. By considering the potential effect of stock liquidity, our model improves not only the stationarity of price-dividend ratios but also out-of-sample forecasts of returns. We show that our model helps explain a number of asset pricing puzzles such as the equity volatility puzzle and unusual stock market behavior in the 1990s.