Normal Dividend Yield for S&P 500?

[racemize]

I'm working on an essay showing how much an active investor has to beat the market by in order to achieve the same after tax returns, given various investment lengths, turnover rates, and annual returns.  In order to properly model this, I have to account for the dividends that are taxed for index returns.  I have a graph from 1870 showing the dividend yields for the S&P 500.  As you can imagine, it is much higher at the beginning (e.g., 6% range) and bottoms at 1998 (~1%).  Thus:

 

1) If you had to guess, what will be the new normal for S&P 500 yields?  3%?  (talking about over the next 10-50 years)

 

2) If anyone can give an explanation on how indices avoid capital gains distributions (e.g, from removing/adding members), I'd appreciate it!

[Vish_ram]

1) your guess is as good as anybody else's

 

2) the indices are maintained by a company/group of people. it is on paper and they can add or remove with gay abandon. The funds (ETF's) that track the indices should buy/sell to track the index (reduce tracking error). When they do it, they'll incur capital gains that are passed to shareholders.

[racemize]

2) the indices are maintained by a company/group of people. it is on paper and they can add or remove with gay abandon. The funds (ETF's) that track the indices should buy/sell to track the index (reduce tracking error). When they do it, they'll incur capital gains that are passed to shareholders.

 

This is how I thought too, but I've read in quite a few places that indices have avoided having any capital gains distributions for the past decade.  I'm not sure how though.  Maybe I'm misunderstanding it, though (although I did have an index investor friend look, and he didn't have any capital gains distributions last year).

[racemize]

Found a good article:

 

https://personal.vanguard.com/us/insights/article/index-funds-tax-072013?SYND=RSS&Channel=MFN

[randomep]

I'm working on an essay showing how much an active investor has to beat the market by in order to achieve the same after tax returns, given various investment lengths, turnover rates, and annual returns.  In order to properly model this, I have to account for the dividends that are taxed for index returns.  I have a graph from 1870 showing the dividend yields for the S&P 500.  As you can imagine, it is much higher at the beginning (e.g., 6% range) and bottoms at 1998 (~1%).  Thus:

 

1) If you had to guess, what will be the new normal for S&P 500 yields?  3%?  (talking about over the next 10-50 years)

 

2) If anyone can give an explanation on how indices avoid capital gains distributions (e.g, from removing/adding members), I'd appreciate it!

 

Well all rates are related right? Earnings is related to interest rates. With interest rates so low PE expansion will cause earnings to be low and that means dividends will be low. If you say that S&P500 yields 3% and say the 10yr treasury is now at 2.75%, then the AVERAGE dividend yield of an S&P 500 company will be more than risk free treasury? that would be almost be impossible.

 

Anyway if you are looking at effective after tax returns, I wrote something about it, basically I give the effective after tax returns as a function of stock market returns , turnover, and tax rates.

 

http://bovinebear.blogspot.com/2013/07/taxes-and-investment-returns.html

 

I don't factor in dividend taxes since that is a small proportion of the return. Also it is effectively turning over annually.