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  • Writer's pictureNate Baim, MBA, CFP®

How Corporate Profits and Dividends Affect Investor Returns


Do you want to understand what moves markets over the long-term? Today I'll discuss recent trends in corporate earnings and why they matter to long-term investors.

In general, quarterly earnings reports help us to understand the health of major corporations which in turn paints a picture of both the economy and the stock market.

Earnings are important for investors because they tend to drive long run returns. In this video I'll explore the corporate profit trends that matter to investors today.

Let's begin with this chart which shows the earnings growth rate for S&P 500 companies since the mid-1980s. The historical average growth rate has been 7.7% over this period but it's easy to see that this fluctuates over time. The level of growth depends on the business cycle since it impacts both top-line sales for companies as well as their expenses.

On the right-hand-side of the chart we can see that earnings growth peaked in 2021 and has been decelerating since. However, some investors are saying we may have reached an inflection point in the third quarter. I would argue there are many reasons to remain cautious and to take only the risks you can afford to take with your plan.

Earnings matters because the stock market tends to follow them in the long run. This chart shows that while the stock market is not the same as the economy, they are related because a stronger economy leads to better corporate performance, which in turn leads to stronger stock prices.

This chart also shows that markets have been volatile over the past two years as earnings have flatlined. This has happened over many periods in history, such as around 2015 when energy companies struggled, or around 2019 when economic growth slowed. Historically, these periods were only temporary and the economy eventually grew again, pushing earnings higher.

While it's unclear where exactly the economy will go from here, a return to profitability is a welcome sign for investors since it helps to make the stock market more attractive.

Finally, earnings matter because they help to support dividend payments by companies. Dividends, after all, are simply a way for companies to share profits with shareholders.

While bond yields have increased significantly this year, there are still parts of the market that can generate attractive dividend yields. These are sectors such as Real Estate, Utilities, and Energy that tend to be more "defensive" in nature, and thus have not participated as much in this year's rally. These sectors have dividend yields that are averaging just under 4%. These sectors are just one of many alternatives to consider when building a portfolio needed to help you confidently work toward your goals.

These three charts highlight just a few reasons that earnings are important to long-term investors. I hope you found these insights helpful - please reach out if you would like to discuss any of these topics in more detail. Thanks, and I hope you have a great start to the holiday season!

Have something on your mind?

Nate Baim, MBA CFP(R)

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