“The market1 looks expensive” is a common refrain we hear today. Sure, after a seven-year bull, the U.S. market as a whole looks more expensive. Yet some prognosticators say we can get as low as zero real returns from the U.S. markets over the coming years. This is too pessimistic in my view, and I will point to the part of the market that looks most attractive to me from a return expectation standpoint.
Professor Jeremy Siegel, in his book Stocks for the Long Run, showed that the long-term average real (after-inflation) return on stocks approximated 6.5% over many periods.
The summation of current dividend yield and net buyback yields can be viewed as an important indicator for long-term return potential. The reason: An investor does not need to assume there is any real growth on top of those two sources of returns.
In a blog post titled “Why Dividends and Buybacks Matter to Investors”, we showed how the WisdomTree U.S. Quality Dividend Growth Index and the WisdomTree Dividend ex-Financials Index had a combined dividend and net buyback yield close to 6%.2 These were the two highest combined dividend and net buyback yields of our various U.S. Indexes, and we believe they are two of the most attractively priced segments of the U.S. markets from a pure valuation standpoint (measured solely on this dividend and net buyback indicator).
A few interesting benchmarks: The S&P 500 Index had a combined dividend and net buyback yield of 4.36%.3 When we look at the large-cap universe of stocks over the last 15 years, it has averaged a combined dividend and net buyback yield of 3.1%.4
Although the summation of the current dividend yield and net buyback yields for the above are lower than Siegel’s constant of 6.5%, current readings don’t look expensive compared to the recent 15-year history. Assuming no growth and no change in valuations going forward, an investor could expect to earn the combined dividend and net buyback yield, currently higher than the zero some prognosticators are predicting.
1Market refers to the S&P 500 Index.
2Source: WisdomTree, as of 3/17/16.
3Sources: WisdomTree, FactSet, Standard & Poor’s, as of 3/31/16.
4Sources: WisdomTree, FactSet, 3/31/01–3/31/16.
Important Risks Related to this Article
Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.