StockBox Book Review: The Future for Investors by Jeremy Siegel
February 26, 2008
Review by Chandler Lutz
The Short Story:
Professor Siegel’s book, The Future for Investors, aims to show people the best way to maximize returns for the long haul. He uses historical data from the S&P 500 for his analysis and determines that high dividend paying stocks trump their non-dividend paying counterparts.
In Depth Analysis:
Jeremy Siegel is a professor of finance at the University of Pennsylvania and this is his second major book intended for wide scale distribution. Professor Siegel conducted extensive analysis on stocks from the S&P 500 dating back to the S&P’s creation of index (1950) and concludes that the higher dividend paying stocks, which he cleverly dubs the “Corporate El Derados,” achieve the highest returns. He ascertains that dividend paying firms outperform the market two main reasons: (1) during recessionary times the reinvested dividends are able to purchase more shares of a company and (2) non-dividend paying stocks typically suffer from what he calls the “growth trap.”
Siegel labels dividends as bear market protectors and return accelerators. He contends that as the market stumbles, valuations become depressed and reinvested dividends are able to purchase more and more shares which cushion an investor during a downward swing. Then as the market reverses course and expands the “return accelerator” takes hold as the shares purchased via the reinvested dividends rise in value. Using this logic Siegel argues that dividend paying stocks provide the best returns. To make his point, the author examines Philip Morris as a case study between 1992 and 2003. During the ‘90s the famous cigarette manufacturer was plagued with lawsuits and the between 1992 and April 4, 2004 the company’s shares experienced almost no capital appreciation. However, the firm never lowered and its dividend and raised it every year but two. As a result the stock exhibited a total return of 7.15 percent per year. This is the bear market protector. Then an Illinois judge made a favorable ruling in a lawsuit against Philip Morris and the share price jumped from $28 all the way to $50. This is the return accelerator: Philip Morris’s reinvested dividends and sharp upturn in the share price allowed the company to significantly outperform the S&P for the period between the beginning of 1992 and the end of 2003 despite the relatively small amount of capital appreciation.
Also, Siegel attempts to persuade investors to shy away from growth stocks since their premium valuations lead to lower returns. To make this point, he compares two original S&P 500 firms: IBM and Standard Oil of New Jersey between 1950 and 2003. This first table compares some standard growth rates between the two firms:
Growth Measure |
IBM |
Standard Oil of NJ |
Advantage |
| Revenue per share | 12.19% | 8.04% | IBM |
| Dividend Per Share | 9.19% | 7.11% | IBM |
| Earnings Per Share | 10.94% | 7.47% | IBM |
| Sector Growth | 14.65% | -14.22% | IBM |
Clearly, IBM is a firm growing at much faster rate in a healthier industry, but these numbers don’t tell us the whole story. Let’s look at the valuations:
Valuation Metric |
IBM |
Standard Oil of NJ |
Advantage |
| Average P/E | 26.76 | 12.97 | Standard Oil |
| Average Div Yield | 2.18% | 5.19% | Standard Oil |
And finally the total returns:
Return Measure |
IBM |
Standard Oil of NJ |
Advantage |
| Price Appreciation | 11.41% | 8.77% | IBM |
| Dividend Return | 2.18% | 5.19% | Standard Oil |
| Total Return | 13.83% | 14.42% | Standard Oil |
Tables all reprinted from The Future for Investors
Even though Standard Oil of New Jersey (now a little company you may have heard of called Exxon Mobil) did not achieve the share price appreciation of IBM, it did realize a higher total return. This is the bear market protector and return accelerator we talked above. Siegel’s big moral of the story for the book: valuations always matter, growth companies will lead you to disappointment and strong industry growth rarely leads to strong stock returns.
Siegel’s research for this book is quite thorough, but I am not ready to bow down to his all-knowing wisdom quite yet. In my opinion he leaves out two very important issues: (1) taxes and (2) stocks out of the S&P 500. First of all, it’s very difficult to discuss any portfolio strategy without considering its tax efficiency. Throughout history dividends have been taxed at extremely high rates especially for those individuals at the upper echelons of income levels. Even today with dividends taxed at a mere 15 percent it doesn’t make much sense to ignore how taxes affect portfolio performance. I’m not saying that the results will be completely reversed, but I would expect taxes to have some impact on his research.
Some may respond to my criticism by saying that many individuals just invest through tax-sheltered accounts and that this research is quite useful for those investors (if this sounds like you, or if you want to employ Siegel’s strategy for your IRA you may want to check out some exciting EFFs, in particular the Dividend Achievers Portfolio Index Fund). This is true, but I still believe that the majority of investors who read this book have a taxable investment account.
The second complaint I have with Siegel’s book is that it only deals with S&P 500 firms. From this set of companies he determines that growth stocks underperform value and makes this inference to the entire stock market universe. Obviously growth stocks in the S&P 500 are typically going to fully valued. These are the most watched companies on earth with teams of analysts looking for any discrepancy between price and value. The same does not apply with small cap companies. Most firms with low market caps are never in the news or followed by a large number of analysts. This allows investors to purchase growth at a reasonable price and allow for large returns.
Overall, Professor Siegel provides great analysis on the S&P 500 index and stresses one point to investors above all else: valuations always matter.
Chandler Lutz does not own shares in any company mentioned