Friday, December 10, 2010

BlackRock Says: "Dividends Make Up 90% of Total Return"

One the face of it that statement is wrong. They must have some sort of reinvested, compounded methodology in mind.
From CNBC's Behind the Money:
If Congress fails to extend the Bush tax cuts on dividend income, they will be taking a direct hit at the most important part of an equity investment, one which accounts for nearly all of its return.

“Some may be surprised to learn that 90 percent of U.S. equity returns over the last century have been delivered by dividends and dividend growth,” said BlackRock’s Richard Turnill and Stuart Reeve, in a report to clients today advocating investment in dividend stocks. They head the global equity team for the world’s largest money manager....

“With government yields plummeting around the world, and interest rates possibly staying low for a significant length of time, expectations are rising for a period of below-trend growth and possibly deflation,” said the BlackRock strategists. “We believe those higher-yielding companies that recognize the lower-growth environment and commit to realistic dividend growth will be much better positioned to outperform than those companies that use their cash on balance sheet to grow through acquisitions.”

The BlackRock report showed that the long-term benefit of dividends is not just a U.S. phenomenon. Since 1970, more than 80 percent of European equity returns came from dividend yield and growth, it stated, citing data from GMO....MORE, the bits between the ellipses is worth reading.

We have quite a few links to the academic study of equity returns, here are a few posts: 

A subject near and dear to my heart. I may be the only person I've ever met who read every page of The Cowles Commission's Common Stock Indexes 1871-1937. [you must be a blast at parties -ed]
(links below)
Lifted in toto from EconomPic Data:
Following my post Equity Valuation Matters, I received a request to show the results in real terms (presented here).

As I said then:
Please note this still misses a HUGE sources of return (dividends), which accounts for a much larger share of actual returns than people think. An almost identical amount as change in index in fact (dividend yield has averaged 4.49% since 1871, while returns on the index have averaged 4.45% over that same time frame). It makes the current ~2% dividend yield look awfully small.

I will look to show results of total S&P 500 return vs. the Fair Value method next week. 
Here goes...
Does Stock-Market Data Really Go Back 200 Years?
 General Electric Dividend: Good Sign or Management out of Ideas? (GE)
Up and Down Wall Street: Rob Arnott "After Lost Decade, It's Still Tough to Find Returns "
Equity Risk Premium: "Why the market’s rate of return—and your nest egg—may never recover"
"Snoop Dogg tries to rent entire country of Liechtenstein"
A Really Smart Guy On Stocks, Bonds and Expected Returns
What Risk Premium Is “Normal”?
The Financial Times Gets to the Heart of What Société Générale's Albert Edwards is Saying (Sept. 24, 2010)