Based on our post from earlier today (“Anatomy of a Bull Market“), we received a request to decompose U.S. equity returns over rolling 10-year periods.

The graph presenting this data is below. To perform these calculations, we calculate the annualized return generated by each source (inflation, dividends, earnings growth, and valuation changes), take the absolute value, and then normalize so that the total sums to one.

Data Source: Robert Shiller’s data library.  Calculations by Newfound Research.  Monthly data is used to make these calculations. Past performance does not guarantee future results. 

On average over all rolling 10-year periods, each source contributed the following percentage to total return (ordered from biggest to smallest contributor):

  1. Dividends: 31%
  2. Valuation Changes: 28%
  3. Inflation: 25%
  4. Earnings Growth: 16%

We also performed the analysis for shorter (3-year) and longer (30-year) rolling periods.

Data Source: Robert Shiller’s data library.  Calculations by Newfound Research.  Monthly data is used to make these calculations. Past performance does not guarantee future results. 

Over shorter time horizons, valuation changes start to dominate returns:

  1. Valuation Changes (40%)
  2. Dividends (25%)
  3. Inflation (21%)
  4. Earnings Growth (15%)

Data Source: Robert Shiller’s data library.  Calculations by Newfound Research.  Monthly data is used to make these calculations. Past performance does not guarantee future results. 

But over longer periods, the impact of valuations starts to approach zero as shorter-term fluctuations offset each other.  Inflation and dividend yield together drive 70%+ of 30-year returns on average:

  1. Dividends (44%)
  2. Inflation (28%)
  3. Earnings Growth (15%)
  4. Valuation Changes (13%)

[Note: An earlier version of this post used total return data.  We amended the analysis to use annualized returns.]