Which Idiot only focus on Earnings Yield without considering Earnings Growth? – Investment Moats

I was involved in some online discussion regarding a post that an adviser made. Feels so AI generated:

1 Sept 2023 : S&P 4515, STI 3233
Today : S&P 7718, STI 5801

Index return
S&P500 : 70.9% (total return incl. dividends 74%)
STI: 79% (total return including dividends 90%)
Worst still if you adjust for fall US$ the gap is higher. USD fell from 1.35 to 1.26!

Going ahead it can only get worse the reason is very low earnings yield of s&p500 persistent high interest rates compared with STI.

Every dollar invested in STI earns 6% in earnings.
Every dollar invested in S&P500 earns 3.3% in earnings only.

Many finfluencers said S&P500 was best 3 yrs ago because they were looking at rear view mirror. US is a country with debt problems a weakening currency and a stock bubble. All these problems will lead to low equity returns going forward.

There are so many things wrong with this way of looking at it, judging from this post:

1. It is as if Singapore and US equities won’t grow earnings, or their long term stabilized earnings is almost zero. Therefore you are only evaluating total return == current earnings yield.
2. Only presenting the problems of the US, totally not including the positive side of things.
3. Link to #2, I think most would realize that if you have invested in the US for the past 15/16 years, it has been good for your portfolio, but if you are evaluating that at the start in 2010, do you think US with its financial problems…. looks rosy? How similar or dissimilar are things now?

If you are choosing an adviser, you want to ask yourself how would you view if your adviser’s mental model is this myopic. If you are a client, you better hope that he doesn’t recommend any investments that touches the United States. The businesses doesn’t get supplies from US and they don’t sell to the US.

If they do you better ask him why he will still let you have that in your portfolio.

If I show my investment team this post, I am afraid we will potentially lose them to some sort of stroke.

What many investors struggle with, that is related to a review like this is:

1. Didn’t realize that if they agree the behavioral aspect of investing is critical, then you are investing in something that looks rosy in the rearview, and shunning things that looks problematic in the rearview. If you wish to invest with some margin of safety, would you prefer to invest when things are challenging or not challenging? Most likely when its challenging right? If you invest in something that has look so not challenging for 5 years, then what is likely to come next?
2. A total return is made up of a current yield, earnings growth and change in valuation. It’s easier, feels somewhat safer to look only at the yield. And if so, your evaluation is flawed and would you want to make decisions that is flawed.

I wrote about the UCITS S&P 600 ETF IDP6 here in the past:

This ETF pays out a distribution.

The starting distribution is small but it did payout.

The dividend payout ratio for such an aggregate small cap index is low.

Here is the income distribution growth based on initial cost:

An initial low yield on cost of 0.58% in 2009 became a pretty decent yield on cost of 4.57% in 2025.

The 16-year compounded dividend growth is fxxking 13.8% p.a. [Since 2008, IDP6’s total compounded return is 9% p.a.]

What is quite easy to missed out is the dividend payout ratio. There are companies paying out more dividends by increasing their dividend payout ratio but by paying out more, they would potentially have less for future growth. So would that impede them? I think that is case by case.

IDP6’s 4.57% at the end of 16 years is still based on a lower payout ratio unless as an aggregate, the group of small cap companies increase their dividend payout.

Your capital can continue to develop if the dividend payout is low.

So this means that a 2% dividend or earnings yielder can become 4% AND still be relatively healthy in its growth dynamics.

But you can’t always say the same for a high dividend yield, high payout ratio portfolio of companies.

What’s difficult is to look past more than the current dividend yield and to look at the total package which is the yield, earnings growth and change in PE.

Your inability to reframe in your head would lead you to sell stocks when you shouldn’t be selling and buy stocks that you shouldn’t be buying.

Lastly, I think many people find it damn hard to buy a 2%-3% dividend yield company as oppose to a higher yielding company.

Those investors that are more thoughtful would force themselves to look at the past earnings and dividend growth. Those are the champs. But end of the day, its psychologically tough.

The champs were able to look past their uncomfortableness, trust the theory, and invest, and lived to see their dividend stocks go up to 10% dividend yield due to earnings growth.

Sometimes it is a matter of being able to visualize the numbers.

Let me try my best to help here. These are starting dividend yield and the dividend yield on cost at different growth rates.

Starting Dividend Yield	10% p.a. Earnings growth 10 years later	6% Earnings growth 10 years later
2%	5.2%	3.6%
3%	7.8%	5.4%
4%	10.4%	7.2%

And the dividend payout ratio still remains low.

And we haven’t even talk about PE expansion and compression yet. That will be for another day.

Just for reference, since we are talking about earnings growth, I asked my LLM to take Ed Yardeni’s S&P 600 operating earnings per share to do a 10-year rolling earnings growth chart. This will let you visualize the range of earnings growth (if you don’t want something mainstream like the S&P 500)

Each point is a 10-year earnings growth.

The first point labeled 2009 is 2000 to 2009.

The lowest is 4.5-4.6% p.a. over 10 years. Earnings do grow even when the US was so shitty.

Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.

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Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Fee-only Wealth Advisory Firm Providend. All opinions on Investment Moats are his own and does not represent the views of Providend.

You can view Kyith’s current portfolio here, which uses his Free Google Stock Portfolio Tracker.

His investment broker of choice is Interactive Brokers, which allows him to invest in securities from different exchanges all over the world, at very low commission rates, without custodian fees, near spot currency rates.

You can read more about Kyith here.