Will Low Rates of Return on Stocks Continue?

Abstract

This article is a follow-up to an analysis published in this Journal in 2000 that deals with the high level of market returns in the 1990s. Now we have the negative stock market returns in 2000 and 2001. While three years of negative stock market returns would be extremely unusual, a much more important issue for investors is the likelihood of lower expected returns for the future. We document that this is a function of the unprecedented decline in dividend yields. New probability analysis that focuses on the price appreciation component of total returns shows that a likelihood of earning the historical 11% compound annual average rate of return on stocks is not high when current dividend yields are considered. Instead, if low dividend yields continue, investors may need to adjust their expectations about expected returns on common stocks.