It’s stock dividends, not clever trading, that counts

By November last year, global equities had fallen by 53% in inflation-adjusted, US dollar terms, say Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School in their Global Investment Returns Yearbook, published with Credit Suisse. That’s a whisker less than the slide in the 1929-1931 worldwide bear phase.

But there’s no evidence for the popular belief that a torrid year makes a sudden recovery more likely. The LBS tracked markets in 17 countries between 1910 and 2004, ranking them by the previous year’s performance and dividing them into five groups based on this. You would expect the worst prior-year returns to lead to the best subsequent five-year performances, but in fact there was scant difference between the quintiles. Buying on the dips, in short, is barely more profitable in the following five years than buying on the highs (an average of 6.9% a year for the bottom quintile versus 6.5% for the top).

Another lesson from the report is that the long-term case for stocks depends almost totally on dividends, as John Authers highlights in the FT. The outperformance of stocks against bonds and cash is due to reinvested dividends. Since 1900, UK stocks have grown by a factor of 224, gaining 5.1% a year in real terms with income reinvested. But their capital gain has been just 0.4% a year. That’s lower than the annual gain after inflation for bonds and cash (1% to 1.4%).


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