8/16/2010

How Growth Drives Wealth in 20 Years

How Growth Drives Wealth in 20 Years - Low-Yield Stocks Becoming High-Yields

Investors may ask themselves about the future and their investments. We follow a buy and hold strategy of long-term investments in classical value stocks, dividend stocks and growth stocks. Many companies generate strong cash, pay continuing dividends, repay debt as well as buy own share back in order to increase further earnings per share. Over more than a decade, investors become a picture of steadiness and trust due to continuous increasing in sales and earnings. Regarding some top values of those companies, sales increased by a middle single-digit rate, earnings by a high single-digit rate and earnings per share as well as dividends by a low double-digit-rate.

As of today, we see many of those stocks valuated between a rage of 13-20, measured in price to earnings. At the beginning of the year 2000, we saw many stocks valuated with a Price/Earnings ratio of above 30 and a divided yield of around 1 percent.
Here is a table:




Source: http://www.tradersnarrative.com, as of 03-2009

If we built up a portfolio in an amount of 100k and earn 3k in dividends pretax. Therefore, our portfolio is valuated in average with a Price/Earnings ratio of 16.67 if our investments pay-out half of its income.

Further, we made two scenarios. At first, we calculate with an increase in dividends by 3 percent yearly and a steady Price/Earnings ratio of 16.67. Second, we assume that Price/Earnings will rise over time. A 2 percent points higher growth in wealth leads to an increase in Price/Earnings of 7.81 points, from 16.67 to 24.48.

We have made the same calculations with a growth in dividends of 8 percent and 10 percent in wealth. Here are the results:




Remember, our first example with 3 percent dividend growth leads to an increase in wealth of 3 percent yearly, representing a factor of 1.8 in twenty years. Our latest dividend yield already amounts to 3 percent or 5.42k. If financial markets valuates our dividend stocks in a range of mid-twenties, our portfolio will rise in 20 years by a factor of 2.6 or 5 percent yearly.

If we calculate with an average dividend growth rate of 8 percent and finally an increase in Price/Earnings, we would enlarge our portfolio with a factor of 6.7 in total.
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· Davide Campari-Milano SpA – Value Stock with 19.7% EBIT-Margin
· Woolworths – Australian Retailer with 4.22 Percent Dividend Yield


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