How to Make 10%+ Annually Forever

I thought this was an interesting article in Forbes about hidden sources of yield in stocks. They make some very good points and use some examples to show how the return on a stock can be predicted (to some degree) by taking into account the current yield, the rate of dividend increases, and the expected share buybacks. So the main takeaway is that if investors are only looking at the current yield of a stock they are not getting the full picture and may not make the best investments, and when you take into account the current yield + dividend increases + stock buybacks you can get expected returns > 10%.

I do disagree with this however:

There are three – and only three – ways a company’s stock can pay you:

    1. A cash dividend
    2. A dividend hike
    3. By repurchasing its own shares

When a company buys back shares they are increasing the earnings per share (earnings divided by shares) by lowering the number of shares. But how is that practically different than increasing the earnings per share by increased profits (i.e. earnings)? In my opinion there is no difference, except that earnings are probably harder to predict than how many shares will be bought back. But are earnings harder to predict than future dividend increases, especially when you’re talking about blue-chip stocks? So it would be better to do this kind of analysis by using analyst estimates or past history to project earnings growth and include that along with the other 3.

 

 

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