New York Stock Exchange. Spencer Platt/Getty Images
Bank of America warned that the buy-and-hold strategy for investing that has been so successful may be in danger over the next decade.
If dividends are not reinvested, the bank expects a flat return on the stock market for the next ten years.
BofA stated that reinvesting dividends in the future could result in a return equal to the S&P 500 at 6,600 in 2031.
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If Bank of America's outlook is correct, investors who are conditioned to hold stocks for the long-term could be in for a decade of pain.
Savita Subramanian (equity and quant strategist) led the bank's discussion. The bank stated that its current valuation model forecasts a flat return for stocks over the next ten years - or 0%, according to a Friday report that cited supply chain woes as well as peak globalization.
"COVID-related supply chains issues have extended beyond consumer goods. It is easy to see longer-term signs that global friction exists. Subramanian said that risk premia does not reflect this.
BofA advises investors to reinvest dividends in order to avoid 0% returns over the next ten years.
The note stated that reinvesting dividends could result in a return equal to the S&P 500 at 6,600 in 2031, assuming long-term average growth.
The S&P 500 would see a total return only 36% over the next 10 year, which is a gain of around 3% annually. This is only a fraction the return of 360% over the past decade, which would represent an annualized return around 16% according to data from Koyfin.
Subramanian stated that double digit gains from the benchmark could be difficult to achieve, as stocks are so expensive in almost every metric.
Although BofA's prospects are much worse than in recent history, it would maintain a decades-long trend where dividends drive much of the stock markets return. According to data from Morningstar Funds and Hartford Funds, 84% of all the S&P 500's total return since 1970 can be attributed directly to reinvested dividends.
Investors can either contact their broker to enable automatic reinvested dividends or go online and enable it. If fractional share trading permits, investors can manually buy fractional shares when a dividend is paid.
An Apple investor will buy.0015 Apple shares for every quarter that Apple pays $0.22 per share. Compound interest will then do the rest.
