Long-Term Sources of Investment Returns and a Simple Way to Enhance Equity Returns

Abstract

Investment return from equities is comprised of four components: dividend yield, inflation, real growth in business value, and change in valuation multiples. However, we show that over the long-term investment return from equities is derived primarily from underlying growth in business values. We propose that an investment process that successfully identifies businesses with the ability to grow business value at above average rates, will result in superior investment returns.