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Author: GusSmed Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5068  
Subject: Re: FIRE Benchmarks Date: 9/23/2003 3:33 PM
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Finally, we are able to estimate stock returns. Recall, the dividend yield of the market is currently only 1.5%. And, as we've already seen, the annualized growth of dividends is about 4.5%, for a nominal expected stock return of 6%.

http://www.efficientfrontier.com/ef/403/fairy.htm


I'm not sure he's wrong, but he seems to be messing with the numbers a bit in order to get his desired result. It's not growth in dividends which should be the fundemental benchmark, but growth in earnings. Microsoft is a giant that hasn't paid dividends until recently, and it became that way by retaining earnings. I can't really argue this since I don't have numbers to back this up, but this argument would be invalid if the dividend payout ratio has been decreasing over the same period.

The thing that clued me into the idea that he was likely being intellectually dishonest was this:

Over the past century, the per-capita growth of GDP in the U.S., the world's most successful economy, has been about 2% after inflation and shows no sign of acceleration in the past quarter century.

If the per-capita growth in the GDP was 2%, how was it that dividends gained 4.5% in the same period? He flat out states that It is impossible for long-term corporate growth to be higher than GDP growth for this would entail corporate profits eventually growing larger than the economy itself. So how is it possible that dividend growth has been greater than GDP growth, which is impossible?

Well, the key word is per capita. Earnings growth is tied to gross GDP growth, not per capita growth. The population of the US has increased during that period.

He's also neglecting inflation, which is a serious sin. What is the gross GDP growth over the last century for the US in constant dollars? I'm sure it's not 0%. Yet I'm also sure that inflation has been more than 2% over that period - I think that 4% is the usual historical figure bandied about, though it's currently less than that. If we assume 4% inflation, the real earnings growth, in constant dollars, is probably significantly greater than the 4.5% he quotes.

In short, I think this article is dishonest and biased. I wouldn't be surprised if the real return after inflation has been around 6% historically. If we are currently seeing nearly zero inflation, 6% isn't something to moan about.

- Gus
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