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Abstract
We provide theoretical and empirical evidence over 1871–2014 that total payouts (dividends plus buybacks) are the key drivers of long-run stock market returns. We show that total payouts per share (adjusted for the share decrease from buybacks) grew in line with economic productivity, whereas aggregate total payouts grew in line with GDP. We also show that a dividend discount model (DDM) based on current yields and historical growth rates underestimates expected returns relative to the total payout model. Finally, we demonstrate that the cyclically adjusted total yield (CATY) predicts changes in expected returns at least as well as the cyclically adjusted price-to-earnings ratio (CAPE).
Disclosure:
Morningstar Investment Management LLC uses a version of the methodology outlined in this article to manage multi-asset portfolios.
Editor’s Note
Submitted 29 June 2016
Accepted 28 December 2016 by Stephen J. Brown