[dot1x]

An extremely interesting paper that puts into perspective a lot of investment "knowledge" shared at nauseom almost everywhere.

> Investors have seen countless charts of US stock market performance which start in 1926 and end near the present. But US trading long predates 1926, and the foreshortened perspective that results from a focus on post-1926 data can be misleading.

> The goal is to challenge shibboleths about the expected outcomes of buy-and-hold stock market investing, and to raise questions about the expected performance of stocks versus bonds over long periods.

> Put another way, since 1928 dividends plus inflation accounted for 99.7% of the nominal wealth produced, as of 2008, by investing in stocks.

> Total return measured on the century scale presumes an investor who never needs to spend the dividends or interest received. No real investor, individual or institution, has that luxury. And there is one class of individual investor, now of growing importance within the financial planning literature as the Baby Boom generation ages, for whom the total return metric is particularly malaprop: retirees. Once portfolio accumulation ceases with retirement, portfolio income must be spent to live. Under those circumstances real price return, over short periods lasting two or three decades, becomes an important metric. By that measure, an investment in stocks has been dicey indeed.

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Just to whet your appetite some more:

> Figure 4 [1] illuminates how much of the long-term return on stocks since 1926 has been due to sustained high inflation on the one hand, and to the favorable enhancement from re-investing dividends on the other. Under the one depiction, the portfolio returned about 9% compounded, from near the high in the Twenties to near the low in the Oughts; under the other, only about 1.5%.

> Few contemporary investors expect a multi-decade return on their stock portfolios of 1 2% per year. They have no reason to expect such poor results, because most investors have never seen a post-1926 chart of inflation-adjusted, price-only returns, and have rarely seen any charts extending back past 1896.

[1] https://imgur.com/a/QCtugvC

[lkbm]

> Put another way, since 1928 dividends plus inflation accounted for 99.7% of the nominal wealth produced, as of 2008, by investing in stocks.

I feel like I must be missing something. Why are dividends treated differently from price increases?

As I'm saving for retirement, "stock goes up" and "stock pays dividends" are basically the same thing in my mind. I assume a dividend is effectively a price increase that gets automatically liquidated. I could choose not to re-invest them, but I could also choose to sell some of my non-dividend stock.

It is true that, as a future retiree, I need to be looking at grown on a decade-scale, not century scale. That part makes sense. I'm just confused by this separation of dividends.

[fsckboy]

> I feel like I must be missing something. Why are dividends treated differently from price increases?

you're thinking about it the right way, and they aren't treated differently the way you're thinking. They way they are treated differently is,

if you just look at historical stock prices you will miss the dividends being siphoned off, so you have to track the dividends and put those amounts back into your charts, and it's mentioned over and over so you don't look at the data and wonder if they did the naive thing or the complex thing.

and dividends are taxed in that calendar year as income at the corporate level, and again at the personal level, and not with lower capital gains tax rates, so the amount left over that is available to the investor to spend or reinvest is smaller than the nominal amount, and taxes change over time, and different income brackets pay different taxes (which is ignored, i think, they just use worst case marginal tax rates) Because dividends are income-taxed, it makes sense to earmark that money to spend on yourself if you're going to be spending any of the money on yourself.

and large "institutions" frequently don't pay income tax (I'm not an expert, but churches, foundations, and perhaps pension funds and corporations which have large losses/expenses/depreciation to write off) but they do play a large role in the investment markets, driving market prices etc.

You know what it all reminds me of? climate science. You can measure a ton of metrics and track them over time and try to predict the future, but the data is only a very rough estimate of what's going on, and the underlying dynamics change a lot over time.

[lexapro]

The tax situation also obviously depends on the investors' tax residence. For example in Switzerland, private investors don't have to pay taxes on capital gains. And many countries have a flat tax for dividends and don't consider them income. But then dividends are often additionally taxed at the source, even though you can reclaim it in some cases.

[whoomp12342]

a dividend is a payout of the companies earnings. rather, the portion the company has chosen not to spend on itself. That amount is divide up by how much % you own in the company. If you owned 50% of all the stock, you would directly receive 50% of their profits less re-investing come dividend time

the stock price is how much people are willing to pay for purchase said stock.(consider market share when looking at price, because 2 stocks at $5.2 is the same thing as 1 stock at $10.5)

so yes, from your gains perspective it is the same thing but the source of where the increase in your portfolio is entirely different

[MuffinFlavored]

> dividends plus inflation

Just to make sure I am following correctly, is this referring to the process which:

corporations have had their costs go up roughly 2% per year since 1928, so they have raised their prices roughly 2% per year, making it so that cost increases (labor/good/services/whatever) are "passthroughs" (assuming margins stay the same), passing along increases to customers (who have roughly had their pay increase 2% per year)

and because of this, corporations have stayed profitable (more profitable in dollars, "the same" profitable in percentage given margins/inflation?), and share prices have grown?

[pjc50]

> since 1928 dividends plus inflation accounted for 99.7% of the nominal wealth produced, as of 2008, by investing in stocks.

OK, so strip out inflation to get real rather than nominal returns, and it becomes "stock investment produces almost all its returns in dividends over a long period". Which is .. not that surprising? Because dividends are ultimately why people buy stocks in the first place? The present value of a stock is after all the "net present value" of the expected flow of dividends.

[autokad]

> Because dividends are ultimately why people buy stocks in the first place?

I would disagree, I feel like the mojority of stonk owners think dividends are passe companies, and a real company would reinvest its earnings or buy back stock. I disagree with these people. I think a company that has no intention of paying a dividend is merely an over produced digital collectible.

[Invictus0]

You disagree that buybacks are more tax efficient than dividends?

> I think a company that has no intention of paying a dividend is merely an over produced digital collectible.

So, Amazon is a NFT?

[pixl97]

If Amazon cannot grow, then yes, it's stock price will go down losing you more than you bought the shares for.

[chii]

Therefore, any shareholders of amazon would look to predict when amazon would stop growing, and sell right before the prices have adjusted.

[autokad]

stock buybacks are more tax efficient than dividends, but I disagree they are remotely the same thing. There is plenty of empirical evidence that a stock buyback does little to the stock price in the long run, and I would much rather have the decision what to do with the money even though its less tax efficient.

An NFT is a good way to put it.

[Invictus0]

So if Amazon bought back so many shares so that there were just one left on the public market, you think that the last share would trade for $97?

[pjc50]

I count stock buybacks as "dividends relabelled for tax purposes".

[astrange]

There's other ways to return capital. Another larger company, or Elon Musk, might buy them.

[ghaff]

I think it probably would surprise a lot of people. But you're absolutely right that the Finance 101 argument for how a stock should be valued is the net present value of its dividend stream. Largely fail at the individual firm level of course for various reasons (and is a naive estimate for those many reasons) but it shouldn't be too surprising that it works in aggregate.

[flavius29663]

> presumes an investor who never needs to spend the dividends or interest received. No real investor, individual or institution, has that luxury.

I don't understand this. It's like saying: I don't have the luxury to sell off some of my growth stock. It makes no sense, you sell when you need money, and you re-invest the dividends unless you need money, same thing.

[pedrosorio]

> price-only returns

Why should I care about price-only returns?

[dougSF70]

> Put another way, since 1928 dividends plus inflation accounted for 99.7% of the nominal wealth produced, as of 2008, by investing in stocks.

This would imply that the average investor will generate wealth by investing in equities that pay dividends...in other words profitable companies...

[kqr]

Net present value profitable -- it doesn't have to be profitable any particular year.

[dougSF70]

I was going on to make a comment about how many firms that have IPO'd of late are never been profitable. These firms have not paid any dividends and may never. Yet these firms are hyped up to lure in the retail investor, yet the evidence presented in this paper is that compound growth of dividends is the route to wealth.