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Where stock returns come from

Dividends, earnings growth, and the swing in what investors will pay: Bogle's way of splitting the market's return.

FinanceBogle ch. 2About 5 min: 3 reading, 2 practiceUpdated 27 October 2026

General education, not financial advice.

After this lesson you can

Split a stock market return into dividend yield, earnings growth and the change in the P/E ratio
Calculate the speculative return from a P/E change
Explain why Bogle trusts the investment return more than the speculative return

Builds toward: Invest on your own. Understand low-cost funds, read a fund factsheet, and spot a sales pitch.

Common-sense investing: the case for index funds: lesson 2 of 12

Costs and the market
Investors as a group earn the market minus costs 7 min
Bogle ch. 2
Where stock returns come from 5 min
Bogle ch. 3
Owning the whole market 4 min
Bogle ch. 5
Fund returns versus investor returns 6 min
Bogle ch. 6
Taxes are costs too 5 min
Bogle ch. 7
When future returns are lower 5 min
Bogle ch. 8–9
Why past winners rarely repeat 5 min
Costs and the market
Is advice worth paying for? 7 min
Bogle ch. 11–12
Costs go on forever 5 min
Bogle ch. 13
Bonds and money-market funds 4 min
Bogle ch. 14–15
New indexes and ETFs 5 min
Bogle ch. 16–18
Graham, the arithmetic, and a plan 5 min

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Pairs with Bogle, The Little Book of Common Sense Investing (2007), chapter 2, "Rational Exuberance"

What it is

Bogle, following the economist John Maynard Keynes, divides the stock market's return into two parts:

Investment return: what the businesses deliver. It is the dividend yield at the start plus the yearly growth in earnings.
Speculative return: the effect of a change in the price/earnings (P/E) ratio, the price investors pay for each 1 of company earnings. When investors grow more hopeful and pay more for the same earnings, prices rise faster than earnings; when they grow fearful, the reverse.

Market return ≈ dividend yield + earnings growth + speculative return

The speculative part per year is: (P/E at the end ÷ P/E at the start)^(1 ÷ years) − 1.

Quick check

Tap an answer to check it.

The P/E ratio rises from 10 to 20 over 10 years. What is the speculative return per year?
Show answer
about 7.2%. 2^(1/10) − 1 ≈ 0.072.

Why it matters

In Bogle's data, the speculative part was small over the long run (about 0.1% a year from 1900 to 2005), while over single decades it swung widely. Those P/E swings, driven by hope and fear, explain much of the short-run ups and downs. Bogle's conclusion is that long-run returns depend on the businesses, and that past returns boosted by a rising P/E are a poor guide to the future.

Worked example

Bogle's figures for U.S. stocks, 1900 to 2005:

Dividend yield averaged 4.5% and earnings grew 5.0% a year: investment return 9.5%.
The P/E went from about 15 to about 18 over 106 years: (18 ÷ 15)^(1/106) − 1 ≈ 0.17% a year. Bogle rounds it to 0.1%.
Market return: about 9.6% a year in Bogle's data (his rounded 0.1% on top of 9.5%; with the unrounded 0.17% the sum is about 9.67%), almost all of it from the businesses.

Compounded, 1 invested in 1900 at 9.5% a year grows to about 1.095¹⁰⁶ ≈ 15,000 by 2005. At the after-inflation (real) return of 6.5% a year that Bogle gives, 1.065¹⁰⁶ ≈ 790 times the start.

Decade by decade, the speculative part swings wildly. In the 1980s the P/E rose from 7.3 to 15.2: (15.2 ÷ 7.3)^(1/10) − 1 ≈ 7.6% a year on top of the businesses' return (Bogle gives 7.7%).

Simply adding the parts is Bogle's approximation; compounding them properly gives a very slightly different answer. The calculator shows both.

Common mistake

Treating a rising P/E as a lasting source of return. A P/E can't rise forever: if it went from 15 to 30 in one decade, that decade gained about 7% a year from mood alone, and a later fall back to 15 would take it away again. Bogle, like many others, calls this tendency to swing back reversion to the mean.

Key terms

dividend yield: yearly dividends as a % of the share price
earnings growth: how fast company profits grow each year
P/E ratio: share price ÷ earnings per share: what investors pay for each 1 of earnings
investment return: dividend yield + earnings growth
speculative return: the yearly effect of a change in the P/E ratio
reversion to the mean: the tendency of unusual results to move back toward the long-run average

Practise the key terms

Tap a card to turn it over. 6 cards.

Front	Back
dividend yield	yearly dividends as a % of the share price
earnings growth	how fast company profits grow each year
P/E ratio	share price ÷ earnings per share: what investors pay for each 1 of earnings
investment return	dividend yield + earnings growth
speculative return	the yearly effect of a change in the P/E ratio
reversion to the mean	the tendency of unusual results to move back toward the long-run average

Practice

Set the P/E start and end equal, and the speculative return disappears. Then try 10 to 20 over 10 years.

Work it through

A market starts with a dividend yield of 2% and earnings grow 5% a year. Over 10 years the P/E falls from 25 to 20. Estimate the yearly market return.

Investment return (%)
P/E ratio end ÷ start
Speculative return (%)
Market return, simple sum (%)

Quick quiz