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As opposed to . . . what?
Never mind, ran a quick excel model, turns out inflation reduces the effective dividend yield, but not by much in a non-highly inflationary enviroment. I guess dividend yield in this case can be an approximation for real return.
^what section of the curriculum did you read that in?
Asset allocation.
Reading 17 page 276.
I believe it was there is level II, I just never questioned it until now.
this became a topic of discussion at work the other day, and i thought i had read that somewhere. Thanks.
The first of Mr. Bogle’s three elements is the starting yield, or annual dividends divided by stock price, currently about 2.2%. Second is earnings growth, which historically has averaged about 4.7%. Together those sources constitute what he calls the “investment return,” because they are based on the cash that companies generate.
Third is the “speculative return,” or any change in the mob psychology of how much investors want to pay for stocks. The S&P 500 is priced nowadays at about $23 per $1 of earnings per share, or a price/earnings ratio of nearly 23.
If that ratio rose to 25 over the coming decade, that would be roughly a 10% increase — boosting stock returns by about one percentage point annually. On the other hand, if the P/E fell to 20, that decline of more than 10% from today’s level would lower the next decade’s returns by about one percentage point per year.
That 2.2% dividend yield, plus the 4.7% earnings-growth rate, equals a smidgen under 7%. If market valuations rise one percentage point annually, that would take average returns up to about 8%; if they fall the same amount, total returns would drop to about 6%.
None of these figures count inflation, which the Federal Reserve has targeted at 2% annually. Subtract that to account for loss of purchasing power, and stocks look likely to return an average of about 5% annually over time; bonds, less than 1%.
Strictly speaking it is not real. In the videos offered by Schweser it is covered in Equity Market Valuation Part 2.
At 9:19 into the video David Hetherington says “we happen to call the one real”. It is just a way of expressing that dividends grow over time, but coupons stay the same.
I don’t think that it has anything to do with the real + inflation = nominal relationship and hence it is confusing.
Hope my understanding is correct, and this is what you are referring to.
In D/P, both the numerator and denominator are nominal variables. So the ratio becomes a real variable as the inflation effect cancels out. D(1+i)/P(1+i)=D/P
Real here simply means the effective rate of return
The difference is fixed income securties have a nominal return that attempts to hedge against expected inflation (with your nominal return ending up net of actual inflation) while in equity, they are inseperable, depending on the actual rate of inflation in the past period, and the amount of inflation pass through done affecting the bottom line (or FCFE). But that gets us into the headache of market expectations of future inflation rates directly affecting prices of equity through Ke, in which case D/P (not CF/P for simplicity) should be expected to go up.
What is a nominal return anyway, returns are always cashflow / price, which ends up being a real return like defacto said. If anything, nominal returns are either backward looking, or another word for promised rate of return with future inflation rates in mind.