If Your Goal is Capital Accumulation, Only One Thing Matters

As Managing Director and Head of Global Financial Strategies at Credit Suisse, Michael Mauboussin advises clients on valuation and portfolio positioning, capital markets theory, and competitive strategy analysis. He has also authored three books -- Think Twice, The Success Equation, and More Than You Know -- and is an adjunct professor of finance at the Columbia Business School, and chairman of the Board of Trustees at the Santa Fe Institute.

Very few people ever earn total shareholder returns, Mauboussin says. He explains why, and lists three things that investors can do to get as close as possible to this elusive target.

Now all you need is some great dividend stock picks
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

A transcript follows the video.

Matt Koppenheffer: That compounding notion is so huge. Buffett loves to talk about that. I was looking back over the last 100 years of returns the other day, and I wasn't thinking, and I did the calculation without adding back dividends.

I kept going over the numbers again and again and saying, "This just doesn't look right. This looks way too low." I added back in the dividends, and it was much larger. The effective dividends over the past 100 years has been huge.

Now, is that because they're dividends, or is that just a capital allocation decision, that the returns would have been relatively the same, regardless?

Michael Mauboussin: Matt, this is a huge question. I think a lot of people are very confused about this concept. Just to be clear, as you pointed out correctly if you look at the returns for the market, say the S&P 500 over the last 100 years or so, it's probably been, on a real basis -- that means after inflation -- sort of 6-7% range. But if you take it before dividends, it's something like 1-2%, so it's a massive difference.

I'm going to make sure I say this correctly. If your goal is capital accumulation, which is gathering lots of money, the only thing that matters is actually capital appreciation.

If your goal is capital accumulation, the only thing that matters is capital appreciation. Let me try to unpack that a little bit. You have a stock that trades at $100 a share, and it pays a $3 dividend. What happens? Well, the day it goes ex-dividend, you now have a $97 stock and $3 in cash, in your dividend.

What you need to do then is, you have to reinvest that dividend back in to make it $100 again. As a consequence, if you keep reinvesting your dividends over time, it is the price appreciation that accumulates your capital.

Now, for that comparison of reinvesting dividends and not reinvesting dividends, there's something we leave out of that, which is that people can consume. In other words, the difference between 6% dividends is because I'm consuming. I'm getting money, and I can go spend the money, so there's utility in that. So that's really not such a fair comparison.

The point being -- and I think this is a big point -- is very, very few people ever earn total shareholder returns. First, most people don't reinvest their dividends. Second is, there's tax on dividends, and third is going back to our behavioral mistake.

The question is, how do I get as close as possible to earning the total shareholder return for the market? The answer is, automatically reinvest your dividends, do it in a tax-efficient fashion, and dollar-cost average, or have some way to be investing methodically, versus getting emotional and pulling money out and putting money in at peaks and valleys.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2886324, ~/Articles/ArticleHandler.aspx, 12/19/2014 3:22:49 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 17,842.30 64.15 0.36%
S&P 500 2,072.49 11.26 0.55%
NASD 4,772.25 23.85 0.50%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes


Advertisement