Figure 1: Decomposition of Historical Equity Returns 1926-2000
Geometric Mean = 10.70%
11%
10%
9%
INC
INC
8%
ERP
4.28%
4.28%
5.24%
7%
6%
g(P/E)
1.25%
5%
RCG
RRF
3.02%
g(EPS)
4%
2.05%
1.75%
3%
2%
CPI
CPI
CPI
3.08%
3.08%
3.08%
1%
0%
1-Building Blocks
2- Income and Capital Gain
3- Earnings
ERP is equity risk premium, RRF is the real risk free rate, CPI is the Consumer Price Index (inflation), INC is dividend income, RCG is real capital gain, g(P/E) is growth rate of P/E ratio, and g(EPS) is growth rate of earnings per share. The block on the top is the re-investment return plus the geometric interactions among the components. Including the geometric interactions ensures the components sums up to 10.70% in this and subsequent figures. Table 1 in the appendix gives the detailed information on the reinvestment and geometric interaction for all the methods.
17 Stock Market Returns in the Long Run
Figure 2: P/E Ratio 1926-2000
136.50
For Dec. 1932
25.96
10.22
1/1926
18 Stock Market Returns in the Long Run
Figure 3: Income Return (Dividend Yield) % 1926-2000
(%)
5.15
Yield
Dividend
1.10
19 Stock Market Returns in the Long Run
Figure 4: Dividend Payout Ratio % 1926-2000
190.52% for Dec. 1931
929.12% for Dec. 1932
(%)
Payout Ratio
Dividend
46.68
31.78
20 Stock Market Returns in the Long Run
Figure 5: Growth of $1 at the beginning of 1926 1926-2000