Long-run stock returns look extraordinary, yet few investors became rich. This brief explains why dividend reinvestment assumptions overstate historical equity returns, reframing the equity risk premium as “the return nobody got.”
Summary
Equity markets have delivered remarkable long-run returns on paper, yet those gains rarely translated into lasting, generational wealth for most investors. “Stocks for the Long Run Revisited: Dividends and ‘The Return Nobody Got’” examines this disconnect by rethinking how long-term equity performance has been measured and, more importantly, how dividends are treated in historical return series.
Dividends have accounted for a substantial share of equity returns over at least the past century. Standard total-return calculations implicitly assume that dividends are continuously reinvested, whether back into the issuing stock, into a perfectly tracked index, or into other securities. These assumptions are analytically convenient, but they describe an investment behavior that was largely unavailable, impractical, or uncommon for most investors before the rise of low-cost index funds.
Drawing on insights from Rob Arnott, Hendrik Bessembinder, Edward McQuarrie, Roger Ibbotson, Jeremy Siegel, and Elroy Dimson, the brief shows that dividends were often consumed, taxed, or reinvested imperfectly. Transaction costs, sales loads, bid–ask spreads, delayed reinvestment, portfolio drift, and management fees materially reduced realized outcomes. When dividends are treated as cash flows that fund consumption rather than as capital that compounds indefinitely, long-run equity returns fall sharply, and the implied equity risk premium narrows accordingly.
The brief also explores how declining transaction costs and the advent of indexing reshaped the economics of investing, contributing to higher equilibrium equity valuations in recent decades. These structural changes help explain why historical averages may offer limited guidance for future expectations.
Ultimately, this brief reframes long-run equity returns as a measure of asset-class potential rather than a record of typical investor experience. By distinguishing theoretical returns from realizable outcomes, it offers a more grounded perspective on equity performance, valuation, and the true nature of the long-term equity premium.
You Might Also Like
Stocks for the Long Run? New Evidence, Old Debates - Paul McCafrey (July 2025)
New Insights on Stocks for the Long Run - CFA Institute Research and Policy Center brought together Edward McQuarrie, Jeremy Siegel, Rob Arnott, Roger Ibbotson, Elroy Dimson, and Laurence Siegel for a debate over stocks vs. bonds and McQuarrie’s new research. (June 2024)
Stocks for the Long Run? Sometimes Yes, Sometimes No - Edward F. McQuarrie (Nov 2023)