The Wharton School has a great stock market professor, Jeremy Siegel, whose wit and wisdom are widely known. Siegel says he asks investors, "Would you take 8% per year on your stock portfolio over the next decade?" They most enthusiastically respond, "Yes."
Know the Score
Siegel notes that in the past 100 years, stocks have fallen 40% or more 6 times beginning in 1906, 1916, 1929, 1937, 1973, and most recently 2000. He says that in any of the first 5 declines, including 1929 to 1932 in which the Dow fell from 381 to 41, if you'd invested at the 40% down mark, your return over the next 5 years averaged 8.6% annuallyâ€” and get thisâ€”that was 8.6% per year above the inflation rate.
Siegel adds, "Looking even further into the future, the average 15-, 20-, and 30-year returns from 40% drops have all given investors above-average rewards."
I can get to the same conclusion another way. The S&P 500 reached 1553 early in 2000. It closed at 1000 in mid-August. If we just get back to that former high over the next 60 months, the compounded growth rate (from price appreciation alone) will be 9.2% per year. Throw in a 2.2% current yield, and the annual total return amounts to 11.4%.
Even if we just recover halfway from 1000 to 1553, the compounded annual total return still amounts to 7.2% per year. Given inflation in the 2% to 3% range, you still beat it by at least 4 percentage points.
Mergent's Dividend Achievers
America's Finest Companies
You can't do that in bonds, and I doubt you'll be able to do it in real estate either. So high-quality dividend-paying stocks with above-average yields remain the most logical choice. Look for US companies with a minimum of 10 straight years of higher payouts. You can find them in and my 13th annual edition of .
Bill Staton, MBA, CFA, is chairman of Staton Financial Advisors LLC, a money management firm whose accounts were up over 20% in 2001 to 2002. Join his free weekly "Dollar-Bill Club" and get a noobligation trial to Bill's weekly "E-Money Digest" by e-mailing email@example.com. He welcomes questions or comments at 704-365-2122, fax: 704-365-1910, or visit www.billstaton.com.