Earnings Growth Drives Total Return and Dividend Income


This article was inspired by an interesting debate between two commenters on my most recent article “Why a 15 P/E Ratio Represents Fair Value for Most (Not All) Companies: FedEx – Part 2.” In a nutshell, the argument revolved around whether dividends were a driver or a contributor to total return. Interestingly, one of the commenters even suggested that their argument was simply a matter of semantics. Personally, I tend to agree with that sentiment because my experience suggests that arguments regarding financial principles and/or terms are often nothing more than misunderstood communications. In other words, both parties are attempting to state the same case, but utilize imprecise language which leads to perceived conflict or debate.

In this example, the phrases driver of returns versus contributor to total return may be a case in point. Are these people meaning to say the same thing in different ways, or is there really an argument that needs to be made and solved? Furthermore, these arguments are also often the result of one party utilizing deductive reasoning whereas the other party is applying inductive reasoning. The website LiveScience has a clear and concise explanation of the differences between inductive, deductive and abductive reasoning for those interested in knowing more.

Nevertheless, whether it comes down to semantics, different forms of argument or reasoning, or simply a failure to communicate, I believe the real issue is for investors to clearly understand how and why investments in common stocks can reward them. Investors armed with this knowledge and understanding can make better, safer and ultimately more profitable long-term investment decisions. I’ve written on the subject in the past, what follows are excerpts from previous articles I have authored:

Excerpts From Previous Articles I’ve Written

In March 2016 I wrote the article “Dividends Don’t Drive Total Return They Contribute To It: Part 1”, what follows are excerpts from that article: