The Realized Historical Return Is the Wrong Yardstick

[CM]

I've written a few times that historical returns are useful, but most here misunderstand the utility. The average historical return is not a useful predictor of future returns unless current and future conditions are similar to historical conditions.

Realized returns depend on starting yield, growth in fundamentals (e.g., dividends, cash flow, earnings), and valuation. Thus, historical yields, growth rates, and valuations--the components of realized returns--are the useful historical data points (not the realized return).

The starting yield is a given. If it is lower than the average historical yield, then we can expect future returns to be lower than historical returns, holding all else equal. Future returns have to be lower unless future growth is faster and/or future valuations rise higher.

The current valuation is also a given. There is no law of nature that forces it back to the long-term average, but if the current valuation is well above the historical valuation, then a prudent investor ought to expect it to fall. In any event, future returns will be lower than historical returns unless the valuation rises even farther above its long-term average (from its current level).

Research Affiliates wrote about this here: https://www.researchaffiliates.com/en_us/publications/articles/634-ignoring-starting-yields-nabbing-this-usual-suspect-in-poor-investment-outcomes.html?evar36=eml_Advisor_Starting_0917_Sec tion_1_Advisor1_title&_cldee=ZXJ3aW4ucm9zZW5AZ21ha WwuY29t&recipientid=contact-3e23c5770e56e411b063005056bc3cff-6ec388c2e3b74009af67228218cb154d&esid=c6b047ff-e8a2-e711-80d2-005056bc1247.

(Hat tip to Always Passive, a bogleheads.org poster. I just found the link through his/her post.)

Excerpts:

 

Not only do we have to deal with a range of possible life expectancies, but a changing average life expectancy over time. A 65-year-old male in 1980 would have been expected to live until 79.1 years, a five-year shorter period of retirement bliss than he would be looking forward to today. The combined positive effects of advanced diagnosis, less smoking, more nutritious diets, better safety in occupational workplaces, vaccines and antibiotics, and seatbelt laws, among other factors, equate to a longer life expectancy. Fairly indisputable. Obviously, it doesn’t make sense to use a mortality table from 1980 to determine a client’s most likely retirement horizon in 2017 (37 years later).

Starting conditions matter in life expectancy, and as we’ll see shortly, also in expected returns.

***

Despite this clear relationship, the retirement calculators at respected investment management firms—those with hundreds of billions of US dollars of client assets—appear anchored on history.  For example, Vanguard² uses a 4.0% real (after inflation) annualized long-term expected return. Dimensional Fund Advisors assumes real annualized long-term expected returns of 1.0% and 5.0% for global bonds and global stocks, respectively, implying a real return of roughly 3.9% for a 60/40 global portfolio.³ At first blush, these estimates seem entirely reasonable, and maybe even prudent. Indeed, looking back, a conventional 60/40 US stock/bond blend would have achieved real annualized returns exceeding 4.0% in each of the past 5-, 10-, 20-, 30-, and 40-year periods.

So, why is it unrealistic to expect the same in the future? After all, the past 40 years have witnessed a variety of economic and political regimes and should be a reasonable proxy for the future. To answer this, it is necessary to understand the sources of past returns, going as far back as possible. Let’s focus on equities, the lion’s share of a 60/40 allocation’s return. As Arnott and Bernstein (2002) explain, the majority of the real return on stocks over the past two centuries came from three sources: 1) dividends paid, 2) real growth in dividends paid, and 3) rising valuation levels. Valuation matters. Over the last 40 years ending June 30, 2017, rising valuation levels’ contribution to the annualized real return of the US stock market approaches one-third (2.1% of 7.4%).⁴

Today, yields are dramatically lower, and equity valuations are dramatically higher. The average bond yield over the last 40 years was 6.7% (Barclays Capital US Aggregate), and the average cyclically adjusted price-to-earnings (CAPE) ratio was 21.1 times. As of August 31, 2017, these measures are 2.4% and 30.3 times, respectively.⁵ In other words, today we are experiencing some of the lowest yields and highest equity valuations in modern history. Expecting bond yields to fall even further and CAPE ratios to continue soaring doesn’t seem sensible—but that’s precisely what’s happening when investors and their advisors rely on history to gauge the future.

***

Are our models overly pessimistic? Are we simply being “permabears” and raising false alarms? We don’t think so.⁹ Using the same equity decomposition framework we just explained, Vanguard’s founder, Jack Bogle, recently gave a fairly low assessment of future US equity returns:

Looking forward, Bogle said, in the next 10 years investors should expect only 2.0% from dividends and 4.0% from earnings growth. With P/E ratios at 26.3 (now 30), Bogle said investors could expect to lose 2.0% from P/E contraction, for a total return of 4.0% (Huebscher, 2017).

For an apples-to-apples comparison with our previous real-return estimates, we can net out our US inflation assumption for the next 10 years, 2.1%, to get a real return for US equities of 1.9%, based on Bogle’s estimate of 4.0%. If equities  produce a real return of 1.9%, then bonds would have to deliver a return —net of inflation—of nearly 7.2% to get to a 60/40 real expected return of 4.0%. From a starting yield of 2.4%?  Not. Gonna. Happen.

[NJDoc]

Agreed , I have heard this stated by numerous well respected individuals, like Bogle and Shiller. We are in interesting territory with high valuations and low bond yields, so a 4% total return is certainly a possibility. Hence, many people try to diversify into alternative investments, i.e.) real estate , to try to improve the total portfolio returns. I think it was Shiller who said, there is a good option for this problem : "save more".

[Dr.V. Investor]

I agree with this.  People are too optimistic with their projections.  I do not blame physicians since many financial advisors give them 7% (to be conservative) on their retirement projections.  Unfortunately, many  do not look at fundamentals of stocks- earnings, growth, cash flow, liabilities, etc. It is inefficient use of their time since stocks keep going up anyway.  A lot would argue that it they do not need the money and they could ride it out.  Stay the course.  I think even with 4% projected return, people should also think what could be the interim loss.  Some respected investors expect 60% interim loss in 60/40 allocation. What more for 100%, 90/10 stocks?

[ko]

So just as a point of context, what do you think real returns will be over the next 10 years for a 60/40 equity-to-bond or 70/30 portfolio?

Really just curious where you're landing after taking all this info into consideration.

 

[ITEngineer]

Disagree - The future is hard to predict.

If you are out of college in 2017 and start investing today, 40 years from now what will your actual rate of return be? Who knows but I bet it's close to 4% if you have a 60/40 stock/bond mix. Might the next 10 years be below average? Maybe. Next year we might have a 50% market drop though. Or the market could be flat for a long time as profits catch up to prices. I have no idea.....

I would expect life expectancy to continue to increase which will put even more pressure on programs like social security and medicare. But that's for another form.

Reading through the whole article though, their Lawyer Larry scenario just doesn't hold a lot of practical water. They never mention his current salary, so I ran some numbers through Excel to fit their constraints. If you start at 25 making $50k/year, get 4% raises for 30 years, put 10% away annually with a 7% annual return (before inflation) you end up with slightly less than $800k at 55 with an annual salary of $162k. The savings rate is way too low (for that high of a salary) but if you continue to work and save 10%, you end up with $1.8M at 65. A 60/40 Stock/bond mix is already very conservative. One of their suggestions to meet your goals is to more broadly diversify. What does that mean? You mean lower your rate of return even more? Or 'diversify' by getting into riskier assets? Don't forget to pay your management fees to them! (WCI - How does a financial website not have $$$$ Emoji's? :P )

If you start at $60k and get 2.5% raises (probably more realistic) you still end up with $800k at 55 and $1.77M at 65. The retiree should be patting themselves on the back and enjoying retirement at that point. Not working longer. If $1.8M doesn't allow you to retire what about all those people with < $200k.

[Donnie]

Historical returns are basically all we have to go by, so we can't disregard them. Are GDP and productivity growth going to slow down, driving the declines mentioned by Bogle and others? Maybe. Are we going to keep innovating and will AI revolutionize the world over the next 30 years? Probably. The short answer is that there is litttle reason to think economic and technological expansion won't continue. Does that mean we should assume 8% real returns? Of course not. It is best to be conservative with retirement planning because you only have one chance to get it right.

[CM]

ko wrote:

So just as a point of context, what do you think real returns will be over the next 10 years for a 60/40 equity-to-bond or 70/30 portfolio?

Really just curious where you’re landing after taking all this info into consideration.

 

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For the S&P 500, I estimate future returns with the expected forward dividend yield plus real earnings growth plus/minus an adjustment for valuation.

The forward dividend yield is 1.98% today (S&P spreadsheet available from top listing on this page: https://www.google.com/search?q=s%26p+500+earnings+howard+silverblatt&rlz=1C1CHBF_enUS752US752&oq=S%26P+earnings+howar&aqs=chrome.1.69i57j0l2.10823j0j7&sourceid=chrome&ie=UTF-8).

Siegel reported that real eps grew 1.25%/year between 1871 and 2001 (Stocks for the Long Run, Third Edition, Table 6-1), so I usually use that figure to estimate growth.

If I recall correctly, real eps declined slightly in the 1930s and grew a little more than 3% real during the 20 years following WWII, so my best case scenario for the long-term, real S&P 500 return is about 3.23% (1.98+ 1.25) with a likely range of 2% to 5%.

That's the best case scenario because it doesn't account for valuation change and the valuation is very high today. (That is, this best case scenario assumes today's valuation is the new and future mean.)

The mean PE10 from 1871-present is 16.79 (available in spreadsheet from Shiller's website: http://www.econ.yale.edu/~shiller/data.htm), and it's 30.73 today. Reversion to the mean tomorrow implies a 45.36% loss.

A quick spreadsheet calculation shows that reversion to the mean at a 10-year horizon implies a cumulative, real, 10-year loss of 17.18% (after including dividends and real eps growth for a decade).*

Of course, reversion to the mean is not the worst case scenario. Valuations also fall below the mean (by definition).

The PE10 nadir in 1982 was 6.62. Reversion to this bear market nadir at 10 years implies a cumulative real loss of 54.58% over the next decade (after accounting for dividends and real eps growth).

Reversion to this bear market PE10 even 29 years from now causes a 0.32% cumulative, real loss. Yes, a buy-and-hold, stay-the-course investor will lose money over a 29 year period if we happen to have a bad bear market at that horizon (assuming a historical rate of real eps growth).

---

10-year TIPS have 0.48% real yield, and 30-year TIPS provide 0.93% (https://www.bloomberg.com/markets/rates-bonds/government-bonds/us).

 

So, given a likely small annual loss on the S&P 500 and a small annual gain with bonds, the 60:40 or 70:30 portfolio is likely to tread water over the next decade--unless we see a typical bear market nadir at that horizon. In that case, the 60:40 or 70:30 portfolio will experience a significant loss.

 

*The cumulative real loss calculations don't account for reinvestment of dividends. If dividends are reinvested, then the losses will be worse.

[CM]

Donnie wrote:

Historical returns are basically all we have to go by, so we can’t disregard them.

Click to expand...

I agree. Don't disregard them. Instead, use them appropriately.

The dividend yield is now lower than the historical yield and the valuation is higher. Thus, future returns cannot be as good as historical returns unless future growth is faster than historical growth and/or the future valuation is even higher than the way-above-historical-average valuation we have today.

According to Siegel, the total real return to US stocks was about 6.8% from 1871 to 2001; 4.6% of the return came from dividends and 2.1% from capital appreciation (Stocks for the Long Run, Third Edition, Table 1-1). Of the capital appreciation, 1.25% came from real eps growth (Table 6-1), so the rest came from valuation increase.

We don't have a 4.6% dividend today and the current valuation is far above the norm. Starting conditions matter.

The average 65 yo man can expect to live about 19 more years today. If you had no more information about 65 yo man-in-the-crowd "X," you'd predict 19 more years of life. If you then learned that the man had metastatic lung cancer would you still predict a 19 year life expectancy, or would you use that information to change your prediction?

Donnie wrote:

Are GDP and productivity growth going to slow down, driving the declines mentioned by Bogle and others? Maybe. Are we going to keep innovating and will AI revolutionize the world over the next 30 years? Probably. The short answer is that there is litttle reason to think economic and technological expansion won’t continue.

Click to expand...

These things don't matter much to returns.

GMO found that GDP growth was unrelated to returns in 16 of 17 developed nations during the 20th century. (Perhaps because expected growth was embedded in valuations.) Siegel found that eps growth is much lower than GDP growth, and that the relationship varies significantly over different periods.

Advancing technology doesn't affect aggregate returns because companies compete. Instead, benefits fall to the consumer. (See Buffett's essay on the woes improving technology presented to the original Berkshire Hathaway textile business. In short, it was forced to make capital investments to keep up with competitors, but it couldn't raise prices to reap any rewards from the increased investments--because then its prices would not have been competitive.)

[Donnie]

CM wrote:

Donnie wrote:

Historical returns are basically all we have to go by, so we can’t disregard them. 

Click to expand…

I agree. Don’t disregard them. Instead, use them appropriately.

The dividend yield is now lower than the historical yield and the valuation is higher. Thus, future returns cannot be as good as historical returns unless future growth is faster than historical growth and/or the future valuation is even higher than the way-above-historical-average-valuation we have today.

According to Siegel, the total real return to US stocks was about 6.8% from 1871 to 2001; 4.6% of the return came from dividends and 2.1% from capital appreciation (Stocks for the Long Run, Third Edition, Table 1-1). Of the capital appreciation, 1.25% came from real eps growth (Table 6-1), so the rest came from valuation increase.

We don’t have a 4.6% dividend today and the current valuation is far above the norm. Starting conditions matter.

The average 65 yo man can expect to live about 19 more years today. If you had no more information about 65 yo man-in-the-crowd “X,” you’d predict 19 more years of life. If you then learned that the man had metastatic lung cancer would you still predict a 19 year life expectancy, or would you use that information to change your prediction?

Donnie wrote:

Are GDP and productivity growth going to slow down, driving the declines mentioned by Bogle and others? Maybe. Are we going to keep innovating and will AI revolutionize the world over the next 30 years? Probably. The short answer is that there is litttle reason to think economic and technological expansion won’t continue. 

Click to expand…

These things don’t matter much to returns.

GMO found that GDP growth was unrelated to returns in 16 of 17 developed nations during the 20th century. (Perhaps because expected growth was embedded in valuations.) Siegel found that eps growth is much lower than GDP growth, and that the relationship varies significantly over different periods.

Advancing technology doesn’t affect aggregate returns because companies compete. Instead, benefits fall to the consumer. (See Buffett’s essay on the woes improving technology presented to the original Berkshire Hathaway textile business. In short, it was forced to make capital investments to keep up with competitors, but it couldn’t raise prices to reap any rewards from the increased investments–because then its prices would not have been competitive.)

Click to expand...

I mean technology as driving productivity growth.  Productivity and population growth are the key drivers of GDP.  Profit margin percentages typically get driven down by competitive forces, but they typically stabilize at a normal, positive level.  As GDP grows due to population and productivity growth, such growth should be indicative of dollar profitability growth at companies even if % margins remain the same.

The right question isn't whether equity markets in all countries correlate with GDP (not sure whether the data you mentioned was annual or long term).  It's whether the US markets have a long term relationship with GDP since that is where the majority of us are invested.  Other markets have other exogenous factors that make them different from the US market which would skew such analysis.

Starting conditions matter, but not in ways you can predict, i.e. there is very likely some chaos in financial markets.  Dividends are lower because of a number of factors, so it is hard to say that because dividends are lower or P/E multiples are higher, total returns in the future will be worse than they have been in the past.

[CM]

Donnie wrote:

Dividends are lower because of a number of factors, so it is hard to say that because dividends are lower or P/E multiples are higher, total returns in the future will be worse than they have been in the past.

Click to expand...

Hard to say? Isn't this just math?

Returns are composed of dividends, growth in fundamentals (measured as dividends, earnings, cash flow, etc.), and change in valuation.

If starting dividends are lower than your comparison period (e.g., the historical period under consideration), then future returns will be lower than the comparison period unless future growth is higher and/or future valuation increases.

Likewise, if your comparison period (e.g., 1871-2001) experienced an increase in valuation from beginning to end, then the future holding period will need a comparable valuation increase. Otherwise, future returns will be lower than the comparison period--unless future growth exceeds historical growth.

I don't see how this is up for debate.

[CM]

Donnie wrote:

I mean technology as driving productivity growth.  Productivity and population growth are the key drivers of GDP.  Profit margin percentages typically get driven down by competitive forces, but they typically stabilize at a normal, positive level.  As GDP grows due to population and productivity growth, such growth should be indicative of dollar profitability growth at companies even if % margins remain the same. The right question isn’t whether equity markets in all countries correlate with GDP (not sure whether the data you mentioned was annual or long term).  It’s whether the US markets have a long term relationship with GDP since that is where the majority of us are invested.  Other markets have other exogenous factors that make them different from the US market which would skew such analysis.

Click to expand...

I found this link which summarizes a GMO article that includes graphs on the company's research into the relationship between GDP growth and equity returns: http://www.businessinsider.com/benjamin-inker-on-stock-market-returns-2012-8.

The graphs show a negative relationship between GDP growth and returns. Ben Inker (of GMO) discusses this:

In thinking about the two, let’s use a simple example of a factory in which 1 worker with 1 machine can output 1 widget per day.  You are the factory owner, currently outputting 10 widgets per day with 10 workers and 10 machines.  To achieve a 10% growth, you either need to hire another worker and buy another machine, or you need to improve or replace your machines such that they can output 1.1 widgets per day when manned by one worker.  The first method increases output but not output per head, the second increases output as well as output per head.  From your perspective as the owner, your choice between the two is going to be driven by the cost of improving or replacing the machines relative to the cost of paying another worker and buying another machine identical to your current ones.  Both scenarios involve an investment on your part, though, so while the output of your factory has risen by 10%, we do not have enough information to determine your return on investment.  It would only be 10% by the oddest of coincidences.  You might have a unique widget creation technology such that your machines were twice as productive as any other, giving you a huge return on the investment.  Widget production might be an utterly cutthroat competitive business, such that your return on investment is barely greater than your cost of capital (or, if you’ve screwed up your analysis, less than your cost of capital).  Output is up 10%, and assuming no change to the price of widgets, your aggregate output and gross profi ts should be up 10% as well, if we don’t take into account the cost of capital.  But you as the owner had to invest to achieve that higher profi t, and to do that, you either forwent a dividend you could have otherwise paid yourself out of profi ts, or had to raise the capital from someone else.  The faster you want to grow, the more you will need to invest, but this investment must either come from retained earnings (forgone dividends) or dilution of  shareholders.2  In practice, companies in fast-growing countries generally exhibit both low dividend 
payout ratios and high rates of dilution of shareholders, both of which hurt shareholder returns enough to more than counteract the higher aggregate profit growth associated with fast growth.

***

This discussion is interesting but off topic. The point of the OP is that future returns are highly likely to be much lower than historical returns, and that this is apparent by examining the components of historical returns and then applying grade school math.

[Donnie]

CM wrote:

Donnie wrote:

I mean technology as driving productivity growth.  Productivity and population growth are the key drivers of GDP.  Profit margin percentages typically get driven down by competitive forces, but they typically stabilize at a normal, positive level.  As GDP grows due to population and productivity growth, such growth should be indicative of dollar profitability growth at companies even if % margins remain the same. The right question isn’t whether equity markets in all countries correlate with GDP (not sure whether the data you mentioned was annual or long term).  It’s whether the US markets have a long term relationship with GDP since that is where the majority of us are invested.  Other markets have other exogenous factors that make them different from the US market which would skew such analysis. 

Click to expand…

I found this link which summarizes a GMO article that includes graphs on the company’s research into the relationship between GDP growth and equity returns: http://www.businessinsider.com/benjamin-inker-on-stock-market-returns-2012-8.

The graphs show a negative relationship between GDP growth and returns. Ben Inker (of GMO) discusses this:

In thinking about the two, let’s use a simple example of a factory in which 1 worker with 1 machine can output 1 widget per day.  You are the factory owner, currently outputting 10 widgets per day with 10 workers and 10 machines.  To achieve a 10% growth, you either need to hire another worker and buy another machine, or you need to improve or replace your machines such that they can output 1.1 widgets per day when manned by one worker.  The first method increases output but not output per head, the second increases output as well as output per head.  From your perspective as the owner, your choice between the two is going to be driven by the cost of improving or replacing the machines relative to the cost of paying another worker and buying another machine identical to your current ones.  Both scenarios involve an investment on your part, though, so while the output of your factory has risen by 10%, we do not have enough information to determine your return on investment.  It would only be 10% by the oddest of coincidences.  You might have a unique widget creation technology such that your machines were twice as productive as any other, giving you a huge return on the investment.  Widget production might be an utterly cutthroat competitive business, such that your return on investment is barely greater than your cost of capital (or, if you’ve screwed up your analysis, less than your cost of capital).  Output is up 10%, and assuming no change to the price of widgets, your aggregate output and gross profi ts should be up 10% as well, if we don’t take into account the cost of capital.  But you as the owner had to invest to achieve that higher profi t, and to do that, you either forwent a dividend you could have otherwise paid yourself out of profi ts, or had to raise the capital from someone else.  The faster you want to grow, the more you will need to invest, but this investment must either come from retained earnings (forgone dividends) or dilution of  shareholders.2  In practice, companies in fast-growing countries generally exhibit both low dividend 
payout ratios and high rates of dilution of shareholders, both of which hurt shareholder returns enough to more than counteract the higher aggregate profit growth associated with fast growth.

***

This discussion is interesting but off topic. The point of the OP is that future returns are highly likely to be much lower than historical returns, and that this is apparent by examining the components of historical returns and then applying grade school math.

Click to expand...

Everyone has been saying expect lower returns since the recession and likely even earlier.  Hasn't happened yet.  My point is that we only care about relative changes to US GDP.  US GDP has historically been growing and so has the US stock market.  There is no chance of a negative long term correlation over a long time frame.

CM wrote:

Donnie wrote:

Dividends are lower because of a number of factors, so it is hard to say that because dividends are lower or P/E multiples are higher, total returns in the future will be worse than they have been in the past. 

Click to expand…

Hard to say? Isn’t this just math?

Returns are composed of dividends, growth in fundamentals (measured as dividends, earnings, cash flow, etc.), and change in valuation.

If starting dividends are lower than your comparison period (e.g., the historical period under consideration), then future returns will be lower than the comparison period unless future growth is higher and/or future valuation increases.

Likewise, if your comparison period (e.g., 1871-2001) experienced an increase in valuation from beginning to end, then the future holding period will need a comparable valuation increase. Otherwise, future returns will be lower than the comparison period–unless future growth exceeds historical growth.

I don’t see how this is up for debate.

Click to expand...

Dividend payout ratio (dividends / net income) has declined from 90% in the 30's to 30% in the 2000's.  Companies are retaining more earnings in theory to invest in the business, driving earnings growth.  We shouldn't say total return will be less because companies are paying less of their earnings out in dividends.  Again, in theory a dollar on the company's balance sheet is worth the same as on my balance sheet.

Decade	Price % Change	Dividend Contribution	Total Return	Dividends as % of Total Return	Average Payout
1930s	-41.90%	56.00%	14.10%	N/A	90.10%
1940s	34.8	100.3	135.1	74.20%	59.4
1950s	256.7	180	436.7	41.2	54.6
1960s	53.7	54.2	107.9	50.2	56
1970s	17.2	59.1	76.3	77.5	45.5
1980s	227.4	143.1	370.5	38.6	48.6
1990s	315.7	95.5	411.2	23.2	47.6
2000s	-15	8.6	-6.4	N/A	32.3

[CM]

Donnie wrote:

Everyone has been saying expect lower returns since the recession and likely even earlier.  Hasn’t happened yet.

Click to expand...

Don't see how this is germane.

Donnie wrote:

Companies are retaining more earnings in theory to invest in the business, driving earnings growth.  We shouldn’t say total return will be less because companies are paying less of their earnings out in dividends.  Again, in theory a dollar on the company’s balance sheet is worth the same as on my balance sheet.

Click to expand...

Of course it is correct that total return will not necessarily be less if payout ratios fall, but if dividend returns fall (because of lower payout or other reasons), then total returns will be less unless earnings growth increases or valuation increases. Again, I don't see how this is up for debate.

Don't you agree? If not, please explain.

**

If you do agree with above, then perhaps you expect higher future earnings growth because of higher retained earnings. I think that is unwise, but it is taught in business school.

Like many things taught in business school, this one depends on idealized assumptions. Here the assumptions include competent managers without conflicts of interest. In practice, there is an agency problem. Managers can typically increase their compensation by expanding their empire (even if they overpay for acquisitions) or repurchasing stock (even if the shares are overvalued). On the other hand, paying out dividends reduces the value of stock options and decreases the ability to expand the empire.

Contrary to business school theory, Arnott and Asness found that higher dividends are associated with higher earnings growth: https://www.researchaffiliates.com/documents/FAJ_Jan_Feb_2003_Surprise_Higher_Dividends_Higher_ Earnings_Growth.pdf.

[Donnie]

The answer is complex. Because dividends were historically higher, companies likely had to raise equity or other dillutive capital to fund growth. Such dilutive capital suppressing EPS growth and EPS growth expectations, thereby suppressing valuations. It's really not as simple as dividend yield is down so total return must go down too.

[CM]

Donnie wrote:

It’s really not as simple as dividend yield is down so total return must go down too.

Click to expand...

Agree, as I noted above. However, if dividend payments are down then total return will be down unless future earnings growth is faster and/or the future valuation increase is greater than the past valuation increase.

Donnie wrote:

The answer is complex.

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Disagree. Returns come from dividends, earnings growth, and valuation change. There is nothing else. If one is reduced, then total return is reduced unless one or both of remaining components is increased. That seems simple.