Business

The Three Key Drivers Of Stock Market Returns

Many factors can influence stock prices, but three matter more than most. Tim Bennett reveals what they are in this week’s short video.

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Killik Explains: The Three Key Drivers Of Stock Market Returns

Transcript

Welcome to this Killik explains finance video. This week the three key drivers of stock market returns. Big subject going to brush it down and cover all the basics. Those people I'm sure now overview. First of all there are many factors that can affect the performance of stocks. However most of them are reflected or captured in just three. What are those three. Well first of all we've got the dividend yield quick actual Matt coming up in the moment and its contribution to total returns to number two is the rate of earnings growth. Number three often underestimated or forgotten. And if you guys is the expansion or contraction of the P E ratio combining those and you get a real understanding as to what is driving total stock market returns. So no more putting it all together that if we were to take some Bangal data from various decades going back 1960s through to Oracle the 2010s of 2010 to where we are now and break it down into dividend yield growth and P. So there are my three factors. One. Number two. Number three will be revisiting those in just a moment. Let's just ignore those and look at the annual total return. So quite a bit fluctuation at around seven point six percent in the U.S. market on average based on Vanguard data in the 1960s some chunky returns annually through the 80s and 90s and then back down 2012 and 2010. Now the numbers are there really purely frustration.

What's more interesting is what contribution to these three factors make to those title your returns and walk conclusions you will draw as an investor when looking ahead. Well let's take that into. So that if an festivals what contribution dividend yields make on average to those total annual numbers on the right hand side. And here's your answer. Now you'll notice something about these numbers straight away. Hopefully right away that reasonably steady they are reasonably consistent. And as a percentage of the total that definitely nailed the full picture. Well that doesn't mean you should overlook dividends far from it. So there's nothing more to get from there to there and we'll find out what that is in just a moment. But let's take a quick look at dividend yields. First as a reminder it is a reminder of that video purely on dividend yield you won't see the end this is the annual dividend expressed as a percentage of the share price rises of any simple plain calculation. It's a key component of long term equity. Total returns not least of all because you can reinvest dividends as ever Tammin spend them or attractions. Therefore it's the most stable of the three factors. If we look back here you will see stability in the left hand column.