Payout ratios are less than 100% because if you reduce your distributable reserves, eventually it becomes legally impossible to pay a dividend. In practice payout ratios (for US cos) are probably less than 50%-- but buybacks muddy the picture a lot.Clearly_Irrational wrote:I'm not sure if this is supported by academic research or not, but here is my theory:technovelist wrote:I agree that it is pretty unlikely that one would run out of money with such a low withdrawal rate, but I don't think that is because it is "dividends + interest"; it's just low enough that you almost certainly won't run out.
A) In order to pay dividends or coupon payments over the long term a business has to generate sufficient profits, which means in the vast majority of cases companies pay an amount that is less than their rate of profit. (obviously there are individual exceptions, but we're talking about the aggregate for the market as a whole).
It's not due to productivity increase-- only or simply at any case. Profits go up over time because companies grow. Even at constant profit margin (no productivity increase) an increase in sales will increase your profits, all things being equal. What tends to happen when companies increase productivity (usually by cutting costs) is that their competitors then duplicate it, and that pushes margins back down, and round the circle we go.B) Corporate earnings tend to go up over time as they find ways to increase productivity (As a group, single companies can have all kinds of issues) Asset prices, over the long term, tend to be a stable multiple of the company's discounted earnings. (There are lots of things that create volatility, but this is the mean to which they generally revert)
Growth in productivity in the economy as a whole tends to lead to economic growth (again all other factors being equal). That tends to lead to increases in sales.
Buried somewhere on Efficient Frontier (Wm Bernstein's site) is a paper that shows you that quoted companies have slower profits growth than real GDP. The reason being that unquoted companies (some early stage venture backed, some family owned and private like Bechtel, Cargill or Koch) grow faster than the corporate sector as a whole.
But it's about Earnings Per Share. What companies have done a lot of since the late 1980s is retire equity, thus boosting EPS. Profit margins now are near record highs, and that is precisely what US companies are doing. The reason is probably buried in executive compensation (and fear of hostile takeover).
Unless you are Japan. Calling into question that comforting theory. Fingers crossed, the US is not the next Japan (Europe might be).C) The economy normally has a positive growth rate (once in a while things go backwards but it's very rare and unlikely to be sustained)
Careful, from where PE ratios are now they could go backwards quite easily. We can argue the toss but there have been long periods when they were lower than what they are now.[Since payment rate A is going to be lower than growth rate B during any time period with economy C it's exceedingly unlikely that a portfolio could be depleted by using rate A. In order for that to happen you would need a negative economic growth rate, a failure of companies to improve their productivity or a long term decline in price to earnings multiples. All of those things are so unlikely
EPS growth has come from financial engineering (buybacks and borrowing) as much as it has from genuine profits growth at least in recent years.
"functioning technological civilization based on capitalism"as to be nearly impossible while still having a functioning technological civilization based on capitalism. So essentially, in the only conditions where it won't be true, I won't be worrying about the value of my portfolio anyways.
we are getting terribly close to the Karl Marx critique of industrial capitalism (profit and economic cycles of ever increasing violence due to the problem of labour surplus). It is way too broad an assertion to make.
What we can say is profits have grown in the past, they are likely to do so in the future. Somewhat less for listed companies than for unlisted (note how the number of listed companies in the US has shrunk so dramatically since the early 1990s). And wary of the fact that EPS has been driven by share buybacks to a significant extent-- in effect financial engineering.
However we are starting in a pretty high PE. Probably driven up by share buybacks (and maybe other factors like very low interest rates). That makes the climb uphill in terms of share prices particularly steep.