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Saturday, 7 June 2014

Latest Real Return (above inflation) for shares since 1950

The annual Barclays Equity and Gilt study into historical rates of return once again underlines the value of the dividend in a long term investment strategy.

One of the more familiar strategies designed to bolster long term growth of equity portfolios is to invest in companies that offer a higher, but sustainable, dividend yield, preferably allied to a growing dividend pay-out ratio. 

These attributes, successfully combined with consistent corporate earnings growth, should allow investors to achieve total returns above the rate of inflation, even if market prices for their holdings have flat-lined. 

Research from Barclays shows that the average real rate of return on equities since 1950 has been 6.18% annually – of which 4.48% (72.5% of returns) is linked to the reinvestment of dividend. 

Long term inflation and interest:

So why do pension funds gravitate towards bonds?

The answer is regulation, accounting standards and short termism. Most commercial enterprises cannot afford the short term market price volatility associated with equities, except in a restricted sub portfolio, often referred to the 'growth portfolio'. Often you will see other asset classes in the growth portfolio to utilise diversification benefits. The 'matching' or income portfolio will consist of bonds providing certainty of income to meet cash flows expected.

With bond yields so low in recent years it has become increasingly obvious that a diversified portfolio of high yielding blue chip companies is now a more attractive option to many private investors with a desire to obtain an increasing income from their portfolios.

Warren Buffet often quotes the yield on his original Coca Cola stocks as 55%! This being the current dividend as a percentage of the original purchase price. Of course a bond purchased at the same time would have seen the yield remain the same at around 5% and the original capital would have been massively eroded by inflation.

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