Bank of America outlines what could make or break an investor’s ability to generate positive stock-market returns over the next decade

• The buy-and-hold investment strategy that has worked so well may be at risk over the next decade, Bank of America said in a Friday note.
• The bank forecasts a flat return for the stock market over the next 10 years, unless dividends are reinvested.
• “The simple act of reinvesting dividends could yield a total return equivalent to the S&P 500 at 6,000 in 2031,” BofA said …

Investors conditioned to buy stocks and hold for the long-term may be in for a decade of pain if Bank of America’s outlook proves correct. sh_cad_3

Led by equity and quant strategist Savita Subramanian, the bank highlighted that its valuation model is currently forecasting a flat return over the next decade for stocks – or 0% – according to a Friday note that cited supply-chain woes and peak globalization. sh_cad_4

“COVID-related supply chain issues have spread beyond consumer goods. And longer-term signs of global friction are easy to find. But risk premia barely reflects this,” Subramanian explained. sh_cad_5

To combat the potential 0% returns over the next decade, BofA says the number one thing an investor can do is reinvest their dividends. sh_cad_6

“The simple act of reinvesting dividends could yield a total return equivalent to the S&P 500 at 6,000 in 2031, assuming long-term average growth and payouts,” the note said. sh_cad_7

Hitting that mark in the next 10 years would represent a total return of only 36% for the S&P 500, or an annualized gain of about 3%. That’s just a fraction of the past decade’s return of 360%, representing an annualized return of about 16%, according to data from Koyfin. sh_cad_8

But with stocks expensive on nearly every metric, “double digit gains from the benchmark may be hard to repeat,” Subramanian said. sh_cad_9

While BofA’s outlook is much bleaker than recent history, it would continue a decades-long trend of dividends driving much of the stock market’s return. Since 1970, 84% of the total return of the S&P 500 can be attributed to reinvested dividends, according to data from Morningstar and Hartford Funds. sh_cad_10

To enable dividends to be automatically reinvested, an investor can contact their broker or enable the option online. And if fractional share trading is allowed, investors can manually purchase fractional shares whenever a dividend is paid to their account. sh_cad_11

For example, every time Apple pays its quarterly dividend of $0.22 per share, an Apple investor will automatically buy .0015 shares of Apple. Then, compound interest will do the rest of the work. sh_cad_12