Investment Objective: To Maximise total return (Fund Fact Sheet)

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

Nice way of depicting total shareholder returns

The foundation of long-term investing is the notion that the company's earnings drives the price of a share of its stock.

The foundation of long-term investing is the notion that the company's earnings drives the price of a share of its stock. The higher the earnings, the higher the price.





Comparing the above 2 charts, I will be excited with the bottom one.  The pattern here is that of 3 lines going up "almost parallel" to each other (monotonous "tramlines").  This company's earnings have been growing consistently over many years.  It was therefore not surprising that its share price has risen in tandem.   In addition, it has given dividends consistently over the years.  This dividend too has grown in tandem with the earnings.  However, since the share price has also risen, the DY over the years hovered probably around the same range.

Click here to see more companies with "monotonous tramlines" charts.

For long term investors, the total shareholder returns are from dividend and capital appreciation.  Look at this post here:

Selected Stock Performance Review
http://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdGZuWktpR2dvQUhhSmpkNElXY0NvWmc&output=html

Most of the total shareholder returns will be from capital appreciation of the stock prices.  I will concentrate on ensuring that I invest in a company's earnings.  The dividend is at best a "surrogate" indicator of this company's good earnings.

Related readings:

The story of Ellis Traub:  Investing for Beginners

Shareholder value and Total Shareholder Return (TSR)

While profits are owned by the shareholders, they are not necessarily paid out as dividends, and may be retained  in the business to fund its growth.  For instance, biotech companies often do not pay a dividend to their shareholders.

In reality the return a shareholder sees is the increase in the share price over time, and the cash dividends received from the company.  Typically this TSR is normally calculated over the past 3 to 5 years.

This can be further complicated by using discounted cash flow to reflect the fact that money earned in the future is worth less than its worth today.  TSR calculated in this way is used by a number of companies, but there is little evidence that the stock markets have adopted this as a measure of shareholder value over more conventional measures such as the share price and profit performance.

A drawback of looking at TSR is that we are either

• looking at historic performance over the last 3 to 5 years (which is not necessarily an indication of future trends) or 
• we are estimating future values (say, for the share price) which are not always borne out in practice.