Follow young Cappy on this financial and intellectual endeavor and learn something you just aren't going to find in the MSM.
Understand that there is no such thing as capital gains when it comes to stocks.
Yes, I know there IS such a thing and that it is proven everyday day, but theoretically there shouldn't be any capital gains, let alone an entire retirement industry based on capital gains because, in theory, a market would be efficient enough to price all future profits into the current day price of a stock leaving no room for capital gains.
So why would you own a stock?
Dividends, my good boy. Dividends.
The reason why is that dividends are THE ONLY THING THAT IS PRODUCED BY A CORPORATION THAT IS ACTUALLY PAID OUT TO ITS SHAREHOLDERS. And this is a very important reality to understand if you wish to understand the value of stocks, because when you buy a stock you aren't
"buying the right to vote"
"purchasing a percentage of the firm's assets"
you're not even getting
"a percentage of the firm's profits."
No, you get a proportional percentage of the dividends that are paid out, if any.
That's it. That's all a stock is. A right to a proportional percentage of future dividends the company may pay out.
Ergo, it is ONLY dividends that matter and drive the value of a stock.
So how do stock prices stack up against the dividends they pay? What kind of percent rate of return can you expect from dividends? Well historically you could expect a rate of return around 5%. But with retirement dollars and QE money flooding the market, stocks have been driven so high without a commensurate increase in dividends that you get
are you ready for it?
a WHOPPING 2% rate of return!
But are you really even getting that?
I was listening to the Kerry Lutz show and he had Danielle Park on who made the very astute point of "what about inflation?"
Indeed what about inflation and so with my SAEG I went and calculated the dividend yield going back to 1914 and adjusted it for inflation. And shucks howdy, look at that!
Stocks really haven't been providing a positive rate of return since about the mid 70's.
A couple points, however.
One, the negative rates of return from 1974 on are obviously caused by the oil embargoes and inflationary days of the late 70's. However, ever since then, rates have more or less remained marginally negative, stocks never really beating out inflation. It behooves the question why are stocks going up at in real terms since their ONLY driver of value (dividends) is effectively providing negative rates of return?
Two, the retirement bubble got it's official kick off in 1978 when we had our first ordained retirement plan (the 401k). Since then the stock market has been flooded with dollars which may have driven up capital gains (and made everybody happy on paper), but driven the real rate of return on dividends below zero.
Three, despite the dramatic increase in the stock market since 2008, you'd think inflation-adjusted dividend yields would be driven into negative territory. However, oddly enough, they're positive in the fraction of a percentage point range.
Inflation is very low...or so we're told.
The question is if you believe the official CPI numbers being churned out.
The larger point is not one of whether inflation is being manipulated or retirement dollars are flooding the market or QE-X is driving prices higher, but yields lower. It's just what a lousy investment stocks have been post - WWII when you look at the only thing they produce - dividends.
We don't get excited about bonds that only pay 3%
We whine about our savings accounts and CD's only paying 1%
But by god and shucks howdy, we'll plow trillions into a stock market that pays -.5% because...capital gains.
I just hope when Economics 101 classes are taught in the future, right along side the "Holland Tulip Bubble" some kind econ prof will cite this post.
Enjoy the decline.