A lot of my friends ask me what I think of this credit crisis and my reply has been, over time, it will mean a return to some level of normalcy in the economy. Cheap money allowed a lot of unfavorable things to happen: unnatural appreciation in real estate, a lot of businesses survived that should have gone under if cost of money was closer to historical norms and short-term valuations in stocks that were unsupportable.

If a loss of 20%-50% in your portfolio in less than a calendar quarter jars one to a “back to the fundamentals” approach to investing, what are some things one should be looking for? Firstly, and this is subject of a future post, principal protected structured finance products tend to make the investor and, in some cases, the issuer poorer over time. For a great analysis of how investors may be worse off buying the exotic, I would refer you to Canadian Capitalist’s eye-opening piece on annuities (it’s a three parter- I only linked the first part).

It appears fundamentally, if one believes in stock investing, the majority of a stock’s return relies upon the payment of dividends. Jeremy Siegel, revered in many circles as the investing academic of choice, found that in the last 204 years, the average real return on equities (real return factors in return after inflation) is 6.8% of which 5.1% consists of dividend yield.

To give you some sense of the consistency of dividends as a pillar of stock return, consider dividend yields in both the best period and worst period for equity returns in the post war period that Siegel studied:

1966-1981 (a period characterized by run-away inflation and stagnant growth): Real Return on equity: -0.04%, dividend yield: 3.9%

1982-1999 (inflation is tamed and generally a period of great prosperity): Real Return on equity: 13.6%, dividend yield 3.1%

In other words, dividends tend to be the steady eddie of investing. They mitigate losses in bad times and augment gains in good times; they are a constant portion of a return on equities.