By: Carl Choy, CKW Financial Group-
For what you ask? Pay off the U.S. debt? No, that is a topic I prefer not to touch on, until later. No, $18 trillion is approximately all that is needed to buy the S&P 500 in its entirety, which will entitle you to keep all of the earnings, as well as all of the dividends. Now I know this may seem like an implausible and fatuous plan, but let’s take a minute to think it through.
At 16 times current earnings, the investment rate of return, after tax, would be 6.25%. The dividend income before tax is over 2%. As the sole owner of the S&P 500, it is believed (and hoped) the investment pays more as the years go by and consensus earnings are expected to be 16% higher over the next two years (Yardeni, 3/31/2016, earnings consensus)*. This increases the rate of return from 6.25% to 7.25%, net after tax, in just a few years. On top of the return, you will also be collecting the 2% dividend on $18 trillion ($360 billion) annually. If we give in to the increasing notion that the world will not be growing from 2017 to 2027, we will need to live on just the $360 billion yearly dividend, in addition to receiving 7.25% return ($1.3 trillion), net after tax. As a long term investors (10+ years), this plan would easily return all of our investment back, net after tax, in about 12 years. And, at the end of the 12 years, we are still left with 100% ownership of the S&P 500.
But now we must address the elephant in room: where do we find the capital to fund a purchase of this proportion? Well, currently, Americans have nearly $12 trillion just sitting in cash-like assets**. If we could find a way to borrow this $12 trillion from them, say provide them with 3% yearly and payback $1 trillion a year (based on the 6.25% to 7.25% yearly return from owning the entire S&P 500) we would only need to borrow an additional $6 trillion to accomplish this plan. Or be generous by paying off ~$18 trillion of US Debt with the dividends and earnings on our S&P 500 investment, which would take about 12 years with no growth.
So if rational investors seek the highest net after tax return, over time and adjusted for risk, what makes owning the S&P 500 irrational? Or better yet, what globally diversified investment has a higher expected rate of return, net after tax, adjusted for risk?
Recent Comments