0

I have been reading a book written by John C Bogle. One of his quotes is:

The reality is that the fundamental return, the dividend yield plus the earnings growth of companies

I'm trying to understand what is this actually.

First, I understand that dividend yields are the dividends you receive each year. Over a period of 'n' years, you can add all the dividends to have received and divide them by 'n' to calculate the yearly amount. I get that.

However, I don't understand at all what earnings growth of companies mean. Is that the growth on the stock market price of a particular stock or bond, over a particular period of time?

2

It's literally the growth of earnings (or net profit) per share. Note that both of these returns are rates, not amounts.

For dividend yield, you take the dividend amount divided the the stock price at the time of the dividend to get a rate (like 5%). you can then average the rates over the time period you're interested in.

For earnings growth, you'd calculate the Compound Annual Growth Rate of earnings per share (EPS), which is net income divided by number of shares outstanding. Divide the ending EPS (EPS-N)by the beginning EPS (EPS-0) to the 1/N power (where N is the number of years) and subtract 1

    ((EPS-N/EPS-0)^(1/N)) - 1
| improve this answer | |
  • I see. I still don't understand one thing. Let's say that a company has a very good earnings growth over a certain period of time. It might happen that this earnings growth doesn't reflect on the investor's return, e.g. if the company doesn't yield higher divides and/or its stock price is very low for whatever reason. Is this correct? Or maybe it is just assumed that it will be reflected on the investor's returns? (If so, is this a sensible assumption?) – Martel Apr 16 at 21:05
  • Sure it's possible that earnings growth may not mean stock price growth. Note that dividends reduce the share price by the same amount, which is why it's added back in. Stock price is theoretically based on future growth, so if there's reason to think that earnings won;t grow in the future even if they have in the past you could have a disconnect. – D Stanley Apr 16 at 21:37

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.