About Future Returns
September 20, 2011
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The return on equities is driven by dividends, since companies must ultimately distribute their hard-earned cash to shareholders. Given that reality, recent history of dividend yields portends a disappointing future for US equity investors, one of sub-par returns relative to historical averages.
A recent Wall Street Journal article noted that stock returns don’t typically consist of “exciting price gains with dinky dividends tacked on.” Over the 80-year period ending in September 2010, dividends contributed 44% of S&P 500 returns, despite a stretch during the 1980s and 1990s when valuations bloated and dividend yields shrank.
That is all true, but it actually understates the importance of dividends. Over the long term, dividends have constituted more than 80% of the real return (above inflation), and they were more than 100% of the real return during the 1970s. James Montier provided these charts to illustrate:
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