The Return Accelerator Phenomenon
But that’s not all. That yield support leads to another phenomenon that has been studied by respected Wharton professor Dr. Jeremy Siegel, which he calls the “Return Accelerator” or bear market protector. In essence, investors who reinvest their dividends accumulate more shares during stock market collapses as the dividend yield expanding allows them to gobble up more equity with each dividend check they shove back into their account or dividend reinvestment plan. As we discussed in my in-depth article on investing in the oil majors, that is one of the reasons the oil companies, as a class, did much better than the average component of the original S&P 500 stock market index back when it was introduced in 1957.
In fact, Dr. Siegel demonstrated that the worse the volatility, the better the long-term investor did! The reason has to do with the mathematics. The lower the cost basis of each subsequent purchase, the faster the average weighted cost basis of the entire position is drug down and the more shares the investor accumulates which, themselves, pay dividends. This means it takes a much smaller increase – certainly far less than the previous breakeven point – to get the position into profitable territory.