Trying to understand the investment 'fundamental returns' definition by John C Bogle (what is earnings growth?)
I have been reading a book written by John C Bogle. One of his quotes is:
The reality is that the fundamental return, the dividend yield plus the earnings growth of companies
I'm trying to understand what is this actually.
First, I understand that dividend yields are the dividends you receive each year. Over a period of 'n' years, you can add all the dividends to have received and divide them by 'n' to calculate the yearly amount. I get that.
However, I don't understand at all what earnings growth of companies mean. Is that the growth on the stock market price of a particular stock or bond, over a particular period of time?
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It's literally the growth of earnings (or net profit) per share. Note that both of these returns are rates, not amounts.
For dividend yield, you take the dividend amount divided the the stock price at the time of the dividend to get a rate (like 5%). you can then average the rates over the time period you're interested in.
For earnings growth, you'd calculate the Compound Annual Growth Rate of earnings per share (EPS), which is net income divided by number of shares outstanding. Divide the ending EPS (EPS-N)by the beginning EPS (EPS-0) to the 1/N power (where N is the number of years) and subtract 1
((EPS-N/EPS-0)^(1/N)) - 1
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