Although this is most discouraging for those planning to cash out their stocks and live off their savings, we believe the prospects are much better today than in 2000 for those willing to hold on to their stocks. Twelve years ago equities were selling at approximately 30 times their estimated earnings and their dividend yield was a measly 1%. But today stocks are selling at only 13.7 times their 2013 projected earnings, while their dividend yield is over 2%. Furthermore, cash dividends, which were at a record high in 2012, are rising at their fastest rate in decades. And in contrast to TIPS, whose income payments only keep up with inflation, dividends have grown 1% to 2% faster than inflation over the past half century.
No one will argue with the assessment that the last decade has been horrible for stock investors. But despite the ravages of the worst bear market since the Great Depression and the worst recession in 75 years, dividend growth on the S&P 500 averaged 7% a year. And this dividend growth occurred despite the 20% collapse in dividends during the financial crisis Although there is always a risk of losing money in stocks over the short-term, history shows that there has never been a twenty year period in US stock market history when stocks investor returns have fallen behind inflation. Bonds have experienced 20-year periods where they fell behind inflation, and we would not be surprised to see them fall short again, given today’s high bond prices.
The financial markets have come full circle. In 2000 the stock market soared to unjustified valuations, and stock investors paid the price, with the poorest decade since the 1930s. Today bonds are stretched to their limit while we believe stocks are priced to offer investors better returns. The better question for investors is not whether they are better off now than they were when stocks were last at an all-time high, but how they can be better off going forward. With interest rates at record lows and stocks offering the best income prospects in decades, we have little doubt which asset class will win the next race.
Professor Jeremy Siegel is a Senior Investment Strategy Advisor to WisdomTree Investments, Inc., and WisdomTree Asset Management, Inc. This post was republished with permission from the WisdomTree blog.