Graham and Doddsville -- Value Investing In The New Era Message Board

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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era

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To: porcupine --''''> who wrote (1137)	1/24/1999 1:39:00 PM
From: Freedom Fighter	Read Replies (1) of 1722

More on Dividend Yields: From me: >>The present assumptions for the sustainable growth in real GDP in the U.S. are between the 2.5% and 3.5%. I have seen no higher estimates. The Fed believes it is lower than that upper range presented. Present assumptions are that inflation will average 1%-1.5% over the next 30 years. That would give us between 3.5%-5% free cash flow growth.<< Here's a quick calculation on this. The dividend yield on the DOW is 1.67% The dividend Yield on the S&P500 is 1.32% If we add the .5% to the yield we get 2.17% for the DOW and 1.82% for the S&P500. The dividend discount return calculation is the sum of the yield and the growth rate. The DOW return is 5.67% - 7.17% The S&P500 return is 5.32% - 6.82%. These are reasonable estimates assuming all present assumptions about everything remain the same. However, it does leave out some very important considerations about whether the present very high spread between the cost of capital and its return are sustainable. 125 years of history and standard economic theory suggests it is not. Without going into the details of that discussion, it is a serious risk to those returns. Another risk is short term in nature. Dividend discount models assume a holding period of many many decades. (like 75 years) Any decline in stock prices to more average levels over the next 10-20 years, will wipe away almost all gains over that period and will produce significant losses if they should occur within the next 5 years. So most purchases made at these levels are highly speculative in nature unless you won't be touching the money until you are dead. Wayne Crimi Value Investor Workshop members.aol.com

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