Where Have S&P500 Returns Come From?

Our colleagues over at Plexus Asset management in South Africa put out a fascinating study of the history of S&P500 returns. Prieur du Plessis writes: 

"Albert Einstein described compound growth as the eighth wonder of the world. Although he may have passed away in 1955 – coincidentally the year when yours truly saw his first ray of light – the concept of compounding remains the single most important principle governing investment. Compounding simply means that you can earn interest on your principal investment amount, as well as earn interest on top of interest. The power of compounding can make an investment grow much faster than would otherwise have been the case, and is obviously based on the assumption that interest or dividends are reinvested in the same asset…

More compelling proof that the odds are stacked against the capital-growth-only brigade is gleaned from an analysis of the components of the total return figures. Let’s go back to the total nominal return of 9.2% per annum and see how that was made up. We already know that 2.2% per annum came from inflation. Real capital growth (i.e. price movements net of inflation) added another 2.2% per annum. Where did the rest of the return come from? Wait for it, dividends – yes boring dividends, slavishly reinvested year after year, contributed 4.8% per annum. This represents more than half the total return over time!"

The chart reveals all:

click for larger chart

Fascinating stuff — thanks, Prieur!


Prieur du Plessis
Plexus. Independent Insight in an Uncertain World.
Tel.: +27  21 970 2400

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What's been said:

Discussions found on the web:
  1. Mike M commented on May 11

    Now dividends are 1.8%. So the expected return for stocks if buying today is 6.2%. Not much higher than T-bills.

  2. Gunther commented on May 11

    Inflation running at 2.25 per year including the seventies?? Did they use hedonistically adjusted inflation ex inflation?

  3. Pool Shark commented on May 11

    What Mike and Gunther said.

    Plus, cap gains taxes anyone?

  4. Smokefoot commented on May 11

    They subtracted inflation from capital growth but not from the dividends. I think it would be more correct to scale both capital growth and dividends by inflation, so that you do not bias the results toward dividends. Doing this you see that capital growth and dividends are equally important.

  5. Mike M commented on May 11

    The inflation rate picked up after we went off the gold standard.

  6. will rahal commented on May 11

    The inflation effects on Stock Market returns is interesting. PPI is more detrimental than CPI.
    I created a chart of CPI/PPI vs P/E.
    you can find it in

  7. me commented on May 11

    Bravo Mike

    I wonder what ever happened to Bush’s dividend tax cut? why isn’t the rate paid higher?

    Oh, sorry, that money is used for stock buybacks (even IBM is BORROWING $15 Billion {after already blowing $17 Billion}to buyback) used to drive EPS which drive their options. you would think backdating would be enough.

  8. John commented on May 11


    To the selfish and corrupt, there is never “enough.”

  9. Francois commented on May 11

    Dividends have been cut back for a simple reason: you can’t PR-spin cash, due every quarter or semester. You deliver it, or you don’t.

    As the modern class that has replaced barons, dukes and princes of the Medieval Era, CEOs do not want competition, nor do they want to be held accountable if it is not on THEIR terms. EBDITA (What Buffet called BS Earnings), one-time charges (quite a few of them with a chronic character worse than diabetes mind you), backassward dating options, unlimited perks and the likes are fine.

    But cold, hard moolah, dinero, greenbacks? At regular intervals? To be “given” to “them”? (a.k.a. investors)

    Are you kidding me? Get a grip!

    For those who have a particular problem with the above, why don’t you take a look at the dogged lobbying efforts corporates higher ups have constantly waged to prevent ANY measure of shareholder power upon them.

    By the way, these efforts have been sustained thanks to full coffers, and, contrary to the unions, not under the constant threat of lawsuits and smear campaigns concerning the use of cash for political purposes. But what am I talking about? Corporations ALWAYS make optimum use of EVERY penny they control. Silly me! For one instant, I forgot that free markets isn’t the best thing…it’s the ONLY thing.

  10. John Thompson commented on May 11

    Compunding growth has its’ dips and drops?

    That is really telling. If IBM is not alone burrowing to boost shares, this should be a top news story, like Enron, Tyco, World Crossing, etc. few years back. How long can this last? The only regulation, global cyclical manipulation of market, or meltup, then implosion?

    Can’t even wrap my head around that one. That wasn’t in the earlier article.

  11. Norman commented on May 11

    I look at the level of dividend payouts as a function of how confident investors are in the management of a company or in general, the stock market. If you really like how the company is using their cash flow then you want them to reinvest their earnings for you in the company; if you skeptical, then you want to invest the earnings yourself. So, the acceptance of low dividend payouts is evidence of belief in management.

    With current corporate performance being so good (earnings as a percent of GDP is at a record high) low dividend payouts are accepted.

    So, the question becomes: is the enamoration of corporate management uncalled for? Big Picture followers evidently strongly believe the negative. Don’t you love markets??!!!

  12. Robert ben Kline commented on May 11

    Compound interest-the 8th wonder of the world. . . . that wasn’t Einstein, the way I head it, the Baron Rothschild said that!

  13. m3 commented on May 11

    Now dividends are 1.8%. So the expected return for stocks if buying today is 6.2%. Not much higher than T-bills.

    i don’t know if i agree.

    the three month is yielding 4.69% today.

    for the sake of argument use the 2.2% inflation rate above (which is waaaaay understated, but i digress.)

    4.69-2.2= 2.49% above inflation.

    6.2% > 2.49%

    potential returns on both SUCK right now, but i’ll take my chances with stocks for now.

  14. ManhattanGuy commented on May 11

    how are the bears doing? Market did a u-turn today. Hope you are not short:)

  15. david foster commented on May 11

    Where is P/E expansion in this analysis? Must be implicitly included in one of the other categories.

  16. John F. commented on May 12

    Smokefoot beat me to the punch, correctly smoking out the problem with the analysis. The chart appears to be adding nominal dividends to inflation-adjusted capital gains…adjusted for ALL of the inflation in the TOTAL return. Both components should be adjusted equally.


    WTF are you talking about?

  17. JP commented on May 12

    Very interesting chart, especially since there was no S&P 500 before 1957.

  18. Winston Munn commented on May 12

    The debate over which mismeasurement of inflation mischaretcterizes the least seems unproductive. A better debate might be what is the true inflation rate and what is the best means to calculate this.

    One school of thought is that inflation is equal to that amount of surplass money produced in excess of GDP. However, this does not factor in population growth, and I would think a stable per capita currency level would indicate zero inflation while a growth would indicate inflation. Perhaps the best method would be a combination of population growth and ecnonomic expansion subtracted from money supply.

    Estimates 2006: M3 11%. GDP 3.4%. Population growth 0.9% = 6.7% inflation. Subtract a bit for foreign influence in M3 and call it 6.5% inflation.

    This to me “feels” more accurate – the money was debased by 6.5% so the my $20 bill in my pocket will only buy $18.70 worth of last year’s priced goods.

    Guess it’s time to substitute generic cereal for name brand, and burn candles for light instead of lamps – but wait, food and energy aren’t part of inflation. So why am I forced to scale back?

  19. Mebane commented on May 12

    Dividends should be seen in the context of total payout yield. Check out my post here:


    Dividends are only one way of returning capital to shareholders. Share repurchases are another such method , and since they are not taxed like dividends, it can be argued they are a more efficient way of returning profits. Buybacks represent about half of all shareholder payouts, and have increased steadily since the early 1980’s. There is a structural reason for this, and is due primarily to the SEC instituting rule 10b-18 in 1982 – providing a safe harbor for firms conducting repurchases from stock manipulation charges. See Grullon and Michaely [2002] for more info on the impact of Rule 10b-18.

    The paper, by Boudoukh, Michaely, Richardson, and Roberts is titled, “On the Importance of Payout Yield”. The authors examined the payout yield and net payout yield, whose formula is:

    Payout Yield = $ spent on dividends + $ spent on share repurchases
    (Net payout is simply subtracting the $ raised through new share issues to the above formula)

    The authors find that “the widely documented decline in the predictive power of dividends for excess stock returns is due largely to the omission of alternative channels by which firms distribute and receive cash from shareholdlers.” Additionally, while dividend yield has lost its predictive ability over time, the payout yield has remained a robust indicator for excess stock return.

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