What’s meant by “low returns” capitalism

Bondholders invest in bonds with the expectation of getting returns in the form of interest. Shareholders invest with the expectation of getting returns in the form of dividends and capital gains.

Historically, typical bond yields ranged between three percent and seven percent. Over the course of the last decade they’ve generally been below three percent. Right now they’re below two percent.

Stockholders register capital gains during bull markets but capital losses during bear markets. A person who bought stocks at the peak of the 1920s bull market saw no capital gains on those investments for twenty-five years, until 1954. A person who bought stocks at the peak of the 1980s Japanese bull market has experienced capital losses on those investments since 1990 (the Nikkei average was at 40,000 in 1989 and now stands below 30,000).

The bull market in American stocks that started in 1982 is likely near a peak. A person who buys stocks at the current level of over-valuation probably won’t see any capital gains for a decade or two.

In regard to dividends:

Company X made $100M in profits last year. It might re-invest $70M in new or upgraded plant and equipment plus additional research-and-development in hopes of growing the company further. The remaining $30M could be distributed as executive bonuses and shareholder dividends.

If $20M goes to dividends and there are two million shares outstanding then the dividend-per-share is $10. If the stock price is $300 then the dividend yield is 3.33% (10 is 3.33 percent of 300).

Historically, typical dividend yields have ranged between three and eight percent. Three percent is considered pretty low.

If, in a bull market, the stock price of Company X increases from $300 to $750, then the dividend-per-share of $10 results in a dividend yield of only 1.33 percent.

In other words, the stock price has gone insanely high and the yield has gone insanely low. That’s where things stand in 2021. The overall (averaged among all stocks) yield of the SP 500 right now is 1.33%.

A person who buys stocks right now can expect no capital gains for many years and 1.33% in return on dividends. Bonds are yielding about 1.5%. Returns on a full portfolio of stocks and bonds figure to be between one and two percent. CD rates are around one percent. If inflation ranges around two percent, then capital investments will have no return at all in real terms.

Hedge fund professionals can find exotic yield-maximizing investments (and they can manipulate markets), but the average “retail” investor just drips money into standard passive mutual-funds via their 401(k) month by month. Their prospects for returns are abysmal. This is unprecedented, and no one knows what it means for the capitalist system to offer investors in general essentially no return on capital.