The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk

by William J. Bernstein

Estimating the value of a stock or stock market by this method is a very complicated calculation, but can be simplified as follows: Return = dividend yield + dividend growth rate + multiple change Since 1926, stocks actually yielded an average of about 4.5%. Earnings and dividends have grown at about a 5% rate. The term multiple change refers to the increase or decrease in the overall dividend rate. In this case, it refers to the fact that stocks which sold for 22 times dividends (a 4.5% rate) in 1926 now sell for 77 times dividends (a 1.3% rate). This calculates out to an annualized multiple change since then of about 1.7%. Add these three numbers together and you get 11.2% compared to the actual historical return of 11.22%. Not too shabby. (There were, of course, a few bumps on the road to that return.)