Disturbing Numbers

I have looked at my Gordon Model data to investigate Investment Returns. I do not like what I see.

The Total Return = the Investment Return + the Speculative Return.

The Investment Return = the initial dividend yield + the annualized growth rate of dividends (i.e., dividend amounts).

The Speculative Return = the effect of changing multiplies (e.g., P/E10).

Now to look at some numbers. All values are adjusted for inflation.

Using Averages

1881-2004 Averages
Dividend Yield = 4.45%.
Annualized Growth in E10: 1.46%.
Investment Return (sum): 5.91%.

1901-2000 Averages
Dividend Yield = 4.52%.
Annualized Growth in E10: 1.38%.
Investment Return (sum): 5.90%.

1921-1980 Averages
Dividend Yield = 4.74%.
Annualized Growth in E10: 1.64%.
Investment Return (sum): 6.38%.

1921-1950 Averages
Dividend Yield = 5.51%.
Annualized Growth in E10: 1.21%.
Investment Return (sum): 6.72%.

1951-1980 Averages
Dividend Yield = 3.96%.
Annualized Growth in E10: 2.07%.
Investment Return (sum): 6.03%.

1981-2004 Averages
Dividend Yield = 2.93%.
Annualized Growth in E10: 1.51%.
Investment Return (sum): 4.44%.

Using Medians

1881-2004 Medians
Dividend Yield = 4.34%.
Annualized Growth in E10: 1.44%.
Investment Return (sum): 5.78%.

1901-2000 Medians
Dividend Yield = 4.37%.
Annualized Growth in E10: 1.47%.
Investment Return (sum): 5.84%.

1921-1980 Medians
Dividend Yield = 4.58%.
Annualized Growth in E10: 1.51%.
Investment Return (sum): 6.09%.

1921-1950 Medians
Dividend Yield = 5.51%.
Annualized Growth in E10: 0.67%.
Investment Return (sum): 5.89%.

1951-1980 Medians
Dividend Yield = 3.52%.
Annualized Growth in E10: 2.30%.
Investment Return (sum): 5.82%.

1981-2004 Medians
Dividend Yield = 2.90%.
Annualized Growth in E10: 1.68%.
Investment Return (sum): 4.58%.

Analysis

Keep in mind that the Gordon Model is most accurate at predicting returns from 5 to 15 years into the future.

These numbers show that the Speculative Return has added to the Total Return in the past. Part of the 6.5% to 6.7% real, annualized, long-term total return is from the expansion of multiples.

The Dividend Yield of the S&P500 has steadily decreased throughout the last century.

The annualized growth of earnings, as measured using E10, has been relatively stable, around 1.5%, with averages ranging from 1.2% to 2.1% per year and with medians ranging from 0.7% to 2.3% per year. The spectacular earnings growth since 1995 has barely brought the post-1980s growth rate back up to normal levels.

The Investment Return has been declining steadily since 1921.

Low dividend yields have not brought about faster earnings growth.

Low dividend yields have reduced Investment Returns.

Have fun.

John Walter Russell
January 20, 2007