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Gordon Equation - The answer is...........
Old 09-08-2004, 02:29 PM   #1
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Gordon Equation - The answer is...........

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Re: Gordon Equation - The answer is...........
Old 09-08-2004, 04:50 PM   #2
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Re: Gordon Equation - The answer is...........

You want to know the correct way to predict the future, eh? * Of course, it depends on who you ask.

If you ask Bernstein, simply take the historic dividend growth of 4.5% and add the current dividend of 1.6%, and you get an expected nominal return of 6.1%:

Or, take the Bogle approach, and take the current dividend + a SWAG at future earnings growth + another SWAG at P/E growth, and you get around 7.5% nominal:

According to Vanguard, today the 5-year average of earnings growth for TSM is 6.8%, the dividend yield is 1.63%, and the P/E is 21.1.

So, if you were to ask Bogle today, assuming he still thinks the market should have a P/E of 18, then he would expect:

1.63% + 6.8% - 16.7%/10 = 6.76% over the next decade

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Re: Gordon Equation - The answer is...........
Old 09-08-2004, 04:51 PM   #3
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Re: Gordon Equation - The answer is...........

Loved the Salmon picture, by the way.
Chuck-Lyn had this post on Gordon Equation from another thread:

<beginning of quote> checked the link you provided above. It states that
real dividend growth is roughly 2-3% per year. If
we use 2.5% real then the Gordon model projects
1.56% + 2.5% = 4.06% real for TSM, or about 7%
if you add back in inflation at 3%. The earnings
model cited in your link projects 4.7% real or about
7.7% with inflation. Both numbers suck but we have
to live with them, I suppose. <end of quote>

That falls in line with what I use, and I got it from Warren Buffet a few years ago -- basically 7% nominal, 4% real returns from equities. I do have value and small tilts, along with international (plenty of emerging markets) so I give myself a bit of a bump from these sometimes hard-to-accept numbers.

Now are we optimists, realists, curmudgeons or pessimists for using these projections?

ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
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Re: Gordon Equation - The answer is...........
Old 09-08-2004, 05:09 PM   #4
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Re: Gordon Equation - The answer is...........

how about:

The Two-Percent Dilution by Bernstein, which pretty much says that investors only actually got b/w 1-1.5% in real dividend growth. Dimson, Stanton, and Marsh seemed to agree - stupid share issuances. Add that to the say 1.5% of Vanguard's TSM or VFINX (depending on whether you use the yield from Vanguard or M*), and get around 2.5-3.0% real expected return on the stock market.

- Alec
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