Thursday, February 14, 2013

Stock Yields

Stock returns include a dividend yield, but Chris Brightman, head of investment management at Research Affiliates, argues that the yield should include a buyback yield. His logic is that if a company maintains its profits and the price earnings ratio remains constant, if the company buys back 2 percent of its stock, the stock price should increase at 2 percent as well. This is similar to the dividend discount model in which the stock price grows at the dividend growth rate. Unfortunately, Brightman's math indicates that the stock market return going forward is only about 6 percent, significantly below the historical average.