So says John Hussman. First, if you don’t know who Hussman is, I recommend that you get to know him. Hussman is a mutual fund manager who runs the Hussman Funds . He is a value oriented manager but also focuses heavily on managing risk, i.e capital preservation in bad market environments. But Hussman is also an economist, an insightful one , who focuses on the long term. I have mentioned two other economists that I follow, Dave Rosenberg and Brian Wesbury (see blogroll), regularly but they are more focused on the near term outllook. Hussman focuses more on the long term and in this context his commentary and research is a must read.
In Hussman’s commentary from Oct 3, 2010 he discusses current stock market valuations on what that says about returns for the next ten years. He says,
Still, with the S&P 500 at a Shiller P/E over 21, and our own measures indicating an estimated 10-year total return for the S&P 500 in the low 5% area, it is clear that investors have priced in a much more robust recovery than we are likely to observe. Our long-term total return estimates are consistent the historical norms based on Shiller P/Es – since 1940, Shiller P/E values above 21 have been associated with annual total returns for the S&P 500 averaging 5.3% over the following 7 years and 4.9% annually over the following decade.
In his view, the market is currently overvalued by about 30% and combined with lower than normal GDP growth in the future the market will return only about 5% per year over the next decade. Well, I agree, with his thinking even if my own outlook calls for 0% returns over the next decade. For the moment, lets take Hussman’s optimistic view (that’s a joke) and see what that means for returns of various dividend stock portfolios. I did a similar analysis in a post the power of dividends to protect portfolios in bear markets. In Hussman’s 5% scenario returns would look something like this;
The cell highlighted in green is the market total return, 5%, which is made up of a 2% dividend yield and 3% annual price appreciation. The yellow cells indicate dividend yields and growth rates that I consider realistic in being able to find is most market environments. Again, it is plain to see the effect the good dividend yields and growth rates have on returns even in this more optimistic but still low return environment.
What is even more surprising, if you’re not fully convinced about the power of dividends, is that these returns for dividend stocks are LOWER than what they would be in my bear market model (one which declines 50% but returns to even in 10 yrs). So, maybe a bear market is not such a bad thing after all….
My point is that dividends matter even in more optimistic but realistic market forecasts, that the current market is overvalued on a historical basis, and that you should read Hussman.
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