Total Stock Returns = Fundamental Return + Speculative Return

Over long periods of time, if you take the entire stock market, you would expect the speculative return to be very negligible. This makes a lot of sense, right? In the end, you’ve got to show me the money! And history agrees. Over the last 100 years, the total annualized return for the total U.S. market was 9.6%, and all but 0.1% of that was explained by earning growth and dividends. (See graph below.)





Fundamental Return = Earnings Growth + Dividend Yield

Speculative Return = P/E Ratio Changes

Total Return = Fundamental Return + Speculative Return

What are we buying when we buy a share of a company? Essentially, we are buying a stream of future money. That money is returned to us the form of earnings growth (which increases the share price) and dividends (which goes straight to us as cash).


http://www.mymoneyblog.com/will-future-long-term-stock-returns-be-less-than-8.html

The Little Book of Common Sense Investing by Vanguard founder Jack Bogle