1. “In the long run, we are all dead.”
–John Maynard Keynes
IF YOU HAVE BEEN INVESTING for awhile, you’ve
invariably run across the conventional wisdom re-
garding historical stock market returns. Over the last
50 years or so, the mantra on Wall Street has been that
if you hold stocks long enough, you’ll eventually earn
somewhere in the neighborhood of 10% annually. The
returns breakdown along the lines of 6% annually from
capital gains and 4% annually from dividends.
In times of stock market turmoil (like the last 10
years?), Wall Street gurus and mutual fund sales depart-
ments tell us to take a deep breath and remain calm—
even while we watch our stock portfolio get summarily
wacked 40%! Again, the key to investing success, we’re
told, is that if we just hang in there long enough, no
matter what the economic or market circumstances,
we’ll eventually earn a decent rate of return. The undy-
ing belief in this seemingly reliable and predictable long
-term 10% annual return from stocks has been driven, at
least in part, by what’s called “Modern Portfolio The-
ory,” or “MPT” for short.
MPT began in the early 1950s by Dr. Harry M.
Markowitz who wrote a series of essays on portfolio
management theory for which he received the Nobel
Prize in economics.(1) Markowitz mathematically dem-
onstrated that it was possible (at least theoretically) to
combine different asset classes into a portfolio that
could provide more consistent returns than one in-
vested in a single asset class—likes stocks. While this
seems almost intuitive today, in 1952 it was an fairly
novel concept. The essential tenet behind MPT is this:
if you diversify a portfolio across different asset classes
such as stocks, bonds, real estate, timber, oil and so on;
the portfolio will grow more consistently—over time—
than one that’s concentrated in just one asset class. The
operative words in the previous sentence are “over time.”
A second important tenet of MPT is that if inves-
tors pooled individual asset classes into broad indexes
(think S&P 500 index fund for example) an investor could,
again theoretically, create a portfolio that would achieve
more consistent, higher annual returns with less “risk.”
Assuming again, as noted, an investor has a long
enough time-frame. Markowitz even gave us a whole
new Greek alphabet soup of portfolio measures such as
alpha, beta, gamma, and delta to construct these more
efficient portfolios and measure returns.
The final ingredient in this new magical formula,
we’re told, is we must assume that financial markets are
efficient. That is, that the current market price of a
stock reflects everything that is known and knowable
about the company. This “efficient” market hypothesis
also applies to the market as a whole. Implied in the
efficient market notion is the fact that, by definition, it’s
impossible for an investor to “beat” the stock market by
seeking out information other investors do not have.
Over the last 50 years, Modern Portfolio Theory
has become the gold standard of investing—at least for
large institutions like pensions and endowments. An
institutional investment advisor rarely gets fired for
using MPT to manage institutional portfolios because if
properly implemented, MPT all but guarantees market
“like” investment returns. Meaning, an MPT managed
portfolio isn’t likely to stray too far from the returns of
the overall market index it’s trying to mimic. Further, if
the stock market goes down say 15%, and an MPT man-
aged portfolio is down “only” 12%, the investment man-
ager has “beaten” the “market.” Such superior “relative”
performance—beating the market, even though the
portfolio lost money—is likely to get the manager re-
warded with more assets under management.
Wall Street has pushed all this highfalutin aca-
demic portfolio theory down to individual investors, and
consequently, we think, instilled a false sense of statisti-
cal certainty regarding potential returns from stocks.
Instead, what’s clear from market history is there have
(Continued on page 4)
2nd Quarter 2010
Volume 11 Issue 2
Helping You Navigate in an Uncertain Investment World
Inside this issue:
Do Stock Investors Earn More
From Capital Gains or Dividends?
1
Defending Cash 2
Inflation Adjusted Market
Returns 1880-2010
4
Inflation Adjust Growth of a $
Market Returns
5
Month End Dividend Yield for
the S&P 500 Index
6
Equity Income Portfolio 2nd Qrt
2010 Update
7
1) Milton Friedman was un-impressed with MPT, and according to Markowitz’s himself, Friedman said, “Harry, what’s this? It’s
not mathematics, it’s not economics, and it’s not finance.”
Do Stock Investors Earn More from Capital Gains or Dividends?
The Answer May Surprise You
Deschaine & Company
is an SEC registered
investment advisor,
managing approxi-
mately $70 million for
pensions, endowments,
and individuals.
WorldHeadquarters
128 South Fairway Drive
Belleville, Illinois 62223
Phone: (618) 397-1002
mark@deschaineandcompany.com
marnie@deschaineandcompany.com
MaryvilleOffice
Jason Loyd
(618) 288-2200
jason@deschaineandcompany.com
HighlandOffice
Matt Powers
(618) 654-6262
matt@deschaineandcompany.com
We’re on the Web at:
Deschaine&Company,L.L.C.
A REGISTERED INVESTMENT ADVISOR

2. Page 2
WITH SHORT-TERM INTEREST
RATES near zero, investors are
stressed about where to invest idle cash.
Investors’ angst over low cash yields
only grew more acute as they watched
global stock markets post double digit
returns over the last year. The S&P 500
Index, for example, was up 79% from
March 9th, 2009 through April 23, 2010.
Comparing a 79% return on stocks to a
paltry ½ percent or less in money mar-
ket funds will ruffle most investors’
feathers—including ours, we’ll admit.
Still, I’m here to tell you, it’s pre-
cisely this lethal combination of impatience and yearning for better
returns that time and again leads investors to take on extra risk (usually
without knowing it) in search of marginally higher yields. It’s called
“reaching for yield.” The flaw in investors’ decision making process is
that it is almost always based on past returns.
As VIEWPOINT readers know,
we’ve advocated holding relatively high
levels of cash (an average of 20%
) for
much of the last 10 years primarily as
protection against the secular bear mar-
ket. And as Chart 3 shows, it’s been a
good strategy—even with low yields.
We continue to recommend hold-
ing a relatively large cash position be-
cause we remain bearish on the long-
term outlook for the stock market. His-
tory tells us the stock market makes a
long-term market bottom when divi-
dend yields are somewhere north of 6.0%
and Price/Earnings ratios are between seven and ten times earnings.
With a dividend yield on the S&P 500 about 2.2% and a P/E ratio of 18,
the market’s a long way from a secular bear market bottom.
You math whizzes out there will quickly calculate that for the
stock market to yield 6.0% requires either a drop in stock prices of
about 60% from current levels, or a tripling of the cash dividend, or
some combination of the two. Before you concern yourself with the
prospects of a sudden or steep drop in stock prices, let me assure you
that secular bear market bottoms are usually reached after a long and
bumpy ride for stocks rather than any dramatic or sharp plunge in
share prices. Small consolation to many of you, I’m sure, but that’s
what stock market history tells us. After
more than 10 years since the stock mar-
ket peaked in March 2000, I’d suggest
the bear market’s right on schedule.(2)
An investor looking to build future
income by capturing higher yields
should consider the relentless share
price declines that occur in bear mar-
kets a huge bonus. Such an environment
results in higher yields for companies
with a history of raising their divi-
dends—in both good times and bad.
If stock market history plays out as
we expect over the next decade, the
S&P 500’s dividend
yield will increase
from it’s current
yield of about 2.2%
to over 6.0%, while
our EQUITY IN-
COME Portfolio’s yield (currently about
6.0%
) could rise to over 10%. I know that
sounds crazy, especially when we’re
staring at near zero short-term interest
rates, but again, that’s what stock mar-
ket history tells us.
In fact, since I was lucky enough
to begin my career in April 1979, I
experienced firsthand the last high dividend yield cycle which occurred
roughly from 1978 to 1985. During that period, investors could’ve
bought stocks with dividend yields in the high single digits across a
whole range of quality companies.
Back to the issue of holding cash in a low-yield environment. It’s
easy to lament earning meager yields
on your cash as you look at your ac-
count statement each month. It’s much
harder to accept that even with low
yields, over a long-term bear market,
cash is usually a winning strategy. Let’s
compare the three most significant bear
market—cash verses stock returns—of
the last 80 years.
The 1929-1933 Deflationary Experience
In the Great Depression, from 1929 to
1933, the stock market dropped a whop-
ping 89% as economic activity dropped
over 30% from a complete collapse of
international trade. Such a precipitous drop in economic actively
caused prices to drop over 25% as deflationary forces kicked in. Over
the same period, 10-Year Treasury Notes(3) produced what by today’s
standards would likely be considered a relatively meager 3.65% annual
return. Yet, an investor smart enough (or lucky?) to have pulled all their
money out of the stock market in the fall of 1929 and plunked it into 10
-year treasuries would’ve not only successfully preserve their wealth
they would’ve had valuable capital to accumulate stocks at less then 20
cents on the dollar in 1933. (See Chart 1)
Legend has it that Joe Kennedy, patriarch to the Kennedy political
dynasty, did just that after a shoe shine
boy, supposedly gave him a stock “tip”
in September 1929. Figuring that if
shoe shine boys were now investing in
the stock market it had to be getting
near a peak, so Joe proceeded to sell all
his stocks and buy U.S. Treasury secu-
rities complete sidestepping the stock
market crash. Joe than began to buy
stocks in 1933 and 1934, building the
family fortune in the process.
(Continued on page 3)
2nd Quarter 2010 Viewpoint
2) And I’m not trying to be flip. It just seems to me it is right on schedule. 3) I used the 10-year Treasury Note in this example for two reasons. First, I was unable to find 90-day Treasury bill data for
the 1929-1933, and second, in a deflationary period, owning the highest quality, intermediate maturity fixed income security is probably as good an investment strategy as we could suggest.
VIEW FROM THE FRONT SEAT by Mark J. Deschaine
In Defense of Cash: In a risky world, cash is the least risky investment.
$1.11
$0.20
$0.00
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
$0.70
$0.80
$0.90
$1.00
$1.10
$1.20
$1.30
1932‐07
1932‐05
1932‐03
1932‐01
1931‐11
1931‐09
1931‐07
1931‐05
1931‐03
1931‐01
1930‐11
1930‐09
1930‐07
1930‐05
1930‐03
1930‐01
1929‐11
1929‐09
Cumulative Returns for 10-Year Treasury Notes
compared to the S&P 500, October1929 to July 1932.
Chart 1: Depression Era Cash & Stock Returns
$2.49
$1.14
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Dec‐68
May‐69
Oct‐69
Mar‐70
Aug‐70
Jan‐71
Jun‐71
Nov‐71
Apr‐72
Sep‐72
Feb‐73
Jul‐73
Dec‐73
May‐74
Oct‐74
Mar‐75
Aug‐75
Jan‐76
Jun‐76
Nov‐76
Apr‐77
Sep‐77
Feb‐78
Jul‐78
Dec‐78
May‐79
Oct‐79
Mar‐80
Aug‐80
Jan‐81
Jun‐81
Cumulative Returns for 90-day Treasury Bills
compared to the S&P 500, December 1966 to July 1982.
Chart 2: 1966-1982 Bear Market Cash & Stock Returns
$1.24
$0.82
$0.40
$0.50
$0.60
$0.70
$0.80
$0.90
$1.00
$1.10
$1.20
$1.30
Dec‐00
Apr‐01
Aug‐01
Dec‐01
Apr‐02
Aug‐02
Dec‐02
Apr‐03
Aug‐03
Dec‐03
Apr‐04
Aug‐04
Dec‐04
Apr‐05
Aug‐05
Dec‐05
Apr‐06
Aug‐06
Dec‐06
Apr‐07
Aug‐07
Dec‐07
Apr‐08
Aug‐08
Dec‐08
Apr‐09
Aug‐09
Dec‐09
Apr‐10
Cumulative Returns for
90-day Treasury Bills
compared to the S&P 500,
December 2000 to May 2010.
Chart 3: 2000-2010 Bear Market Cash & Stock Returns

3. Deschaine & Company, L.L.C.
Clearly, cash, or in this case 10-Year Treasury
Notes, was the investment of choice during the
1929-1933 bear market period.
The 1966 to 1982 Inflationary Experience
Almost the exact opposite investor experience
occurred during the 1966 to 1982 bear market.
Rather than a steep stock market plunge
driven by a sharp, deflationary economic con-
traction, the 1966 to 1982 bear market was a
slow, methodical inflationary grind on inves-
tors. Over the sixteen year period, inflation
slowly yet relentlessly inched up causing an
inflation-adjusted drop in stock prices of over
30%, from 1966 to the market bottom in 1982.
The worst stock market performance period
since the Great Depression. Over the same
period, 90-day treasuries returned a healthy
7.5% per year. Which sounds good, and cer-
tainly is good when compared to the devastat-
ing capital losses posted by stocks during the
period, yet inflation during the period aver-
aged 6.8%. Consequently, cash actually earned
a meager annual return of about 1% after ad-
justing for inflation.
Even with such paltry real returns, cash
was again the hands down winning investment
strategy during the 1966-1982 inflationary
bear market period. By the end of the 1982, 90
-day Treasury Bills were yielding over 12%
and investors thought they were being savvy
putting a big chunk of their assets in money
market funds and short-term CD’s. (See Chart 4)
What most investors didn’t realize was they
were at the bottom of the cheapest stock mar-
ket since the 1930s.
The 2000 to 2010 Experience
(Inflation or Deflation?)
The central question is: “will exploding federal
spending and money supply growth kick off
inflation? Or will mortgage defaults, unem-
ployment and slack consumer spending bring
on lower prices and by definition, “deflation.”
I’ll be honest, I don’t know. After spend-
ing most of the last two years trying to get a
handle on the credit crisis, and the govern-
ment’s and Federal Reserve’s
reaction to it, my initial expecta-
tion was that inflation was the
logical result of an unparalleled
growth of the money supply we
charted in our “Year End Eco-
nomic and Financial Market Out-
look.” (4) After all, as Milton
Freidman noted, “inflation is
always and everywhere a mone-
tary phenomenon.” Put another
way, inflation is defined as: “too
much money chasing too few
goods.” If the supply of money
increases relative to the supply of goods in an
economy, inflation is the result. Given the
money growth over the last year, it wasn’t a ques-
tion of “if” inflation would kick in, but “when.”
However, when you look at the negative
credit data coupled with what is clearly a weak
recovery, it’s not hard to construct a scenario
where debtors continue to default, particularly
in housing and commercial real estate causing
lenders to completely shut down lending
(doing all they can to keep from going bankrupt
themselves) and in turn causing a contraction in
credit for the first time since the early 1930s.
Each dollar of credit written off in a de-
fault is a dollar that evaporates from the
money supply. If loan defaults overwhelm the
government’s efforts to re-inflate the econ-
omy; a deflationary spiral could result. When
you consider the total amount of bad debt
outstanding, it’s not hard to see how deflation
might happen. If that happens, we need only to
look to Japan’s experience since 1989. To see
the consequences of deflation—zero economic
growth over the last two decades.
Yet, whether we get inflation or deflation,
as history shows, one investment strategy is at
least part of the answer—hold cash. Hold cash
during an inflationary period to capture higher
interest rates as short-term interest rates rise
in response to inflation. Investing in quality
investments like U.S. Treasury Bills and
Notes during deflationary periods holds pur-
chasing power as prices decline. Once prices
stabilize, you’ll have buying power to accumu-
late all sorts of assets—from stocks to real
estate to that large boat you’ve always wanted.
All at bargain prices. Assuming, that is, you
didn’t get antsy and invest your cash in some
risky investment looking for an extra ½ in
yield just before it plunged.
It’s times like these that its important to
keep in mind the primary purpose of cash is to
preserve your capital—not to make you rich in
times of high risk—like now.
Editor’s comment: It was pointed out to me by
my esteemed colleagues, Matt and Jason, that this
issue’s Front Seat column was decidedly pro-cash
and anti-stock. Or as Matt noted eloquently: “it
appears you are telling the reader to stay away
from the stock market.” However, that was cer-
tainly not what I intended.
The objective of the article was to note two
things. One: that even in a low yield environment,
cash serves an important purpose in protecting a
portfolio from an indiscriminate and uncaring
stock market. And two, cash provides readily
available buying power as the stock market peri-
odically offers up quality dividend stocks at at-
tractive yields. I was attempting to point out that
holding cash, even when it may not be yielding
much, serves an important purpose within a port-
folio. At no time have we or would we, suggest
being completely out of the stock market. As the
last year or so shows, the opportunity costs of being
100%
in cash can be considerable when the stock
market stages one of its random rallies.
As readers of Viewpoint know well, we are
long-term owners of quality stocks that pay a
generous and growing dividend. Once we buy a
stock we’ll continue to own it, come what may, as
long as its dividend remains intact. We only sell a
stock if the company cuts the dividend—regardless
of reason—0r if the stock gets way over valued.(5)
Over the next ten years, our objective is to
accumulate as many shares as possible by reinvest-
ing dividends and by investing the portfolio’s cash
reserves in the most attractive stocks that are
available each time we buy.
If we do our job well, by the
end of the decade, our portfolios
should be fully invested in dividend
stocks with a yield on invested capi-
tal of over 10%
!(6)
From there, all we
have to do is kick back, find a quiet
spot on the beach and watch our
dividend income roll in.
To achieve that requires
being invested in quality dividend
stocks and buying more with each
dividend as the bear market winds
down!
(Front Page continued from page 2)
4) Available on deschaineandcompany.com. 5) On occasion, a stock’s share price will rise to a level (and subsequently its dividend yield will drop) that is so far out of whack with it’s historical averages
that it no longer justifies holding onto the stock. 6)“Yield on invested capital,” is the current dollar dividend at an annual rate divided by our total cost of the position.
Page 3
Interest Rates During the Long-Term Bear Markets
Period Beginning Middle End
1929-1932 3.39 3.37 3.50
1966-1982 5.96 5.61 11.35
2000-2010 5.77 1.26 (Double digits?)
Note: 1929-1933 is the 10-Year U.S. Treasury Note, the
other two periods is the 90-Day U.S. Treasury Bill rate.
Comparing Annual Returns for Stocks With
“Cash” During Three Long-Term Bear Markets
Period Stocks Cash
1929-1933 - 42.48 3.65
2000-2010 -2.07 2.29
1966-1982 -2.78 7.47
15.20
7.07
16.30
11.35
0.15 ‐
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00
15.00
16.00
17.00
Dec‐68
May‐69
Oct‐69
Mar‐70
Aug‐70
Jan‐71
Jun‐71
Nov‐71
Apr‐72
Sep‐72
Feb‐73
Jul‐73
Dec‐73
May‐74
Oct‐74
Mar‐75
Aug‐75
Jan‐76
Jun‐76
Nov‐76
Apr‐77
Sep‐77
Feb‐78
Jul‐78
Dec‐78
May‐79
Oct‐79
Mar‐80
Aug‐80
Jan‐81
Jun‐81
Nov‐81
Apr‐82
Chart 4: Monthly Yield for 90-day Treasury Bills
from December 1966 to July 1982, compared to
the period of December 2000 to May 2010.
Are interest rates going higher?

4. 2nd Quarter 2010 ViewpointPage 4
0.92%
4.87%
‐2.00%
‐1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
1948
1946
1944
1942
1940
1938
1936
1934
1932
1930
1928
1926
1924
1922
1920
1918
1916
1914
1912
1910
1908
1906
1904
1902
1900
1898
1896
1894
1892
1890
1888
1886
1884
been long periods where the stock market did not
grow at all, let alone 10 percent.
An Inefficient, “Efficient” Stock Market
Consider too, that while the MPT driven notion
of “relative” performance may be okay for institu-
tional investors who can wait to years recoup
loses, an individual investor, particularly one in
or getting close to retirement, can’t incur signifi-
cant capital loses and doesn’t have the luxury of
waiting years for his portfolio to recover.
For MPT to work it requires giving it
time—lots of time. Decades in fact. How many of
you are willing (or able) to wait for a mutual fund
that’s been going down for several years in a
row, like many technology funds were in the
early part of the decade, to make a comeback?
Nevertheless, mutual fund managers will always
tell you now is a good time to buy, just as they
probably did six months ago, a year ago and even
ten years ago. In the fund manager’s mind, it’s
never time to sell. Every dip is just a prelude to a
new high. Modern Portfolio Theory says so,
again, if you just give it enough time.
However, had you put your money in a
technology or Internet mutual fund in March
2000, you’re not only underwater, its likely you’ll
never ever see a positive return from that invest-
ment. In addition, as we’ve documented, in detail
here in VIEWPOINT, the stock market’s not been
a friend to investors over the last ten years. Re-
member, the NASDAQ composite index is still
down more than 55% from its 2000 high.
Doing What Works-In time
Paradoxically, most academic studies of individ-
ual investor behavior contend most investors do
not give their investment program enough time.
We would argue the problem may be that indi-
vidual investors have a different time frame than
the extremely long one required to achieve the
annual returns implied under MPT theory. Not
only that, but such an abstract investment con-
cept becomes increasingly less relevant to indi-
vidual investors as
they get closer to
retirement.
C o n s i d e r ,
that in a long-
term, secular bear market, like the one we’ve
been in since 2000, a retired investor cannot
possibly win at the stock market game if they’re
following a strategy, such as espoused by MPT,
that requires a 25-40 year time frame. Put an-
other way, investing one’s portfolio on a long-
term bet that the stock market will always earn
10%—assuming you wait long enough—is nei-
ther practical nor rational—if your time horizon
isn’t 25-40 years. Especially if your retirement
happens to correspond with the beginning of a
secular bear market.
Doing What Works in Generating Returns
“Business is taking a pile of cash, doing something
with it, to get a bigger pile of cash in the end.”
—Leonard P. Shaykin
Often lost in the academic world of MPT invest-
ing, is the notion that a stock represents the frac-
tional ownership of an ongoing, operating
“business.” And just as any owner of any busi-
ness, a stock investor is looking to get his hands
on the cash the business produces. Because you
see it’s the “cash” the business produces that
ultimately determines your investment returns.
The question is, “how does the owner get his (or
her) hands on the cash and when?” The “how” is
either in the form of cash dividends and/or capi-
tal returns from selling shares—ideally after
they’ve appreciated in value. The “when,” of
course, is “the sooner, the better.”
All things being equal, an owner or inves-
tors prefers a busi-
ness that: a) pro-
duces more cash
rather than less; b)
produces cash
that’s available to be distributed to the owners/
shareholders, sooner rather than later; and c)
produces cash that is “predictable” rather then
unpredictable, or even “unknown.”
In all three cases, the present value of quar-
terly cash dividends is worth more (a lot more) to
an owner than the uncertainty of any cash they
may received from capital sales (or again, even
losses?) at some unspecified point in the future.
Given such economic realities, it should be
obvious that stocks that pay a steady and grow-
ing quarterly dividend have more economic value
to investors (i.e. owners) than stocks (or businesses)
that rely solely on capital returns. Not only has
this been confirmed by numerous academic stud-
ies which show that dividend-paying stocks con-
sistently outperform the average stock, but that
stocks with a rising dividend have, in most stock
market periods, rank among the highest perform-
ers. When you think about it, all the academic
studies are really doing is confirming the present
value of discounted cash flows from dividends
compared to capital returns. In other words, the
(Continued from page 1)
(Continued on page 5)
“Compound interest is the eighth wonder of the
world. He who understands it, earns it ...
he who doesn’t ... pays it.” — Albert Einstein
5) Since the long-term superior performance of stocks over bonds is almost a given, its a wonder why dividend investing ever fell out of favor with investors? XX) The chart shows the accumulated annualized
returns for dividends and capital returns for the S&P 500 going back to 1880. For example, from 1880 through June 30, 2010, total return for the S&P is just under 6%, about 1.5% annually from capital
and 4.5% from dividends. See the bar to the far right of the chart. If we add the average annual inflation rate for the 130 year period the annual returns get close to the historical 10% average discussed in the
history books.
Chart 5: Inflation Adjusted Accumulative Annual Returns for the S&P 500 Index by Dividend and Capital (5)
1880 to 2010
Data Source: Standard & Poor’s and Robert Shiller. Chart Deschaine & Company Research

5. Page 5
Deschaine & Company, L.L.C.
6) Of course, the contribution of interest income to total return for bonds over the long term is 100%.
1.65
0.53
2.75
0.53
0.74 0.89
4.53
1.71
4.63
13.08
6.96
11.21
5.42
7.68
‐
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00
1881
1882
1884
1885
1887
1888
1890
1892
1893
1895
1896
1898
1900
1901
1903
1904
1906
1907
1909
1911
1912
1914
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stock market clearly prefers the relative cer-
tainty of cash dividends over the uncertainty of
unknown future capital returns. Why would
anyone argue with that?
Employing What Works
Given our expectations that the next decade will
be a continuation of the past decade, which is to
say, a period of low, and highly uncertain capital
returns from stocks, we don’t think it’s prudent
that investors rely solely or largely on capital
returns to fund one’s retirement. To substantiate
this, take a look at Chart 6 above, which is the
inflation adjusted growth of a dollar for the S&P
500 going back to 1880. Note that from 1880 to
1954, or 73 years, the index showed a negative
inflation adjusted capital return! Also note that
capital returns were negative for most of the last
60 years with the exception of the 1954 to 1966
bull market and the 1982 to 1999 bull market.
So rather than rely on the uncertainty of
capital returns, doesn’t it makes more sense to
focus at least part of your stock portfolio on real
cash returns from dividends and dividend
growth to produce income? Initially, such a
strategy provides growing dividend income for
reinvestment to maximize compounding and
later it provides a steady and growing income
stream to fund a comfortable retirement.
Additionally, a high-yield, dividend growth
strategy is relevant in today’s low interest rate
environment which makes investing in long
bonds—regardless of quality—an extremely
risky proposition.
A Further Look Into What Works
Sungard strategist Gail Dudak noted in 2002,
after one of the many accounting scandals; “Only
companies with real cash flow and real earnings are
able to consistently pay dividends to investors. Divi-
dends are a financial commitment from a company.
They can’t be paid with smoke and mirrors.”
Dudak went on to tabulate over 200 years
of returns from stocks and showed that in 13 of
the 20 decades, reinvesting dividends represent
on average 57% of the total return from stocks in
each decade. She noted an important benefit of
high-yield stocks is the protection the dividend
provides in weak stock market environments.
While Dudak was correct about the per-
centage of returns attributable to dividends and
the reinvestment of dividends for each decade,
she didn’t go far enough in crediting the impact
of cash flows from dividends on total stock re-
turns, which is; “the longer the time period, the
greater the impact of reinvested dividends on total
stock market returns due to compounding.”
In a 2004 study in Plan Sponsor Magazine,
William Raver, revisited the seminal work of
Roger Ibbotson on long-term stock market
returns and confirmed that: “the current income
from both equity and fixed income securities, when
reinvested, forms the predominant share of long-term
reported returns.”
Raver also showed that on average, after
ten years, the percentage of return attributable
to dividend income and its reinvestment is
greater than 50%; and that the value of rein-
vested dividend income after ten years usually
exceeds the value of all the cumulated capital
returns for equities in a given portfolio. He also
confirmed that after 78 years—the period of the
Ibbotson study—the proportion of return attrib-
uted to reinvesting dividends represents 96.2% of
total return from common stocks.(6)
Raver talks about the difficulty investment
managers have in delivering value-added invest-
ment performance. He points out that the typical
equity portfolio has a current dividend yield that
is well below the dividend yield on the bench-
mark being used to measure a manager’s per-
formance. This effectively raises the perform-
ance hurdle for the manager—often by as much
as 2-3% annually in an environment where three
and five year expected excess returns is often
less than 1.5% to 2.0%. “
“Why active equity managers tend to
handicap themselves relative to their perform-
ance benchmark has always puzzled me, espe-
cially given the long-term importance of com-
pounding dividend income to total return.”
Raver, lamented.
We agree and we think the same handicap
often applies to individual investors and their
investment advisors. Using MPT driven asset
allocation studies and colorful presentations
filled with MPT driven expected returns, inves-
tors are told they must sprinkle in some growth,
some value, some large cap, some small cap in
some statically-justified portfolio brew which
only serves to gives investors a false sense of
certainty regarding future expected returns. If
stock market history’s taught us anything, it’s
that various stock market subsets are much
more closely correlated than previously believed.
When one goes down, they all go down.
It’s only when we dig deep into market
history do we see that investing to maximize the
compounding of income—not style, not sector,
(Continued from page 4)
(Continued on page 6)
From 1880 to the early 1960’s the S&P 500 index produced little in the way of capital
returns. A dollar invested in 1880 was worth 89 cents after adjusting for inflation. How’s
that for long-term capital returns? With the exception of the 1920s bull market, an in-
vestor had to wait until the late 1960s to see any significant capital returns from stocks.
Or a modest 80 years! Prior to the 1920s stocks were considered the “income” investment
because of their generous dividends. Bonds were the risky alternative.
Chart 6: Inflation Adjust Growth of a Dollar Invested in the S&P 500 Index
1880 to 2010
Data Source: Standard & Poor’s and Robert Shiller. Chart Deschaine & Company Research
Positive Capital Positive CapitalNegative Negative Capital

6. Page 6 2nd Quarter 2010 Viewpoint
6.14
1.85
1.11
2.61
6.24
2.67
7.44
3.66
8.67
7.79
3.36
13.84
10.15
7.04
6.13
7.17
3.013.03
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not asset classes, but income—is the real driver of
long-term total stock market returns. At the end
of the day, regardless of whether you need in-
come in retirement or to offset poor capital re-
turns in secular bear markets, investing for
growing dividend income to maximize the power
of money to compound is the one proven way to
build wealth in both good and bad economic and
financial periods. History tells us so.
Other Notable & Quotable
WSJ: June 26 2010.
Verizon CEO and Business Roundtable Chairman
Ivan Seidenberg speaking at the Economic club of
Washington, June 22, 2010
THE COMPANIES OF THE Business Roundta-
ble have a huge stake in the success of the
American economy. We create jobs all along the
(economic) food chain. We manufacture and sell
the things consumers need. And we have the
technology, expertise and capital capacity to play
a huge role in contributing to our nation’s eco-
nomic growth.
The BRT has accepted our responsibility as
partners in moving the country forward. My
colleagues and I have worked closely with policy
makers across the political spectrum on matters
from health care to trade and tax policy to en-
ergy and climate change. But frankly, we have
become somewhat troubled by a growing discon-
nect between Washington and the business com-
munity that is harming our ability to expand the
economy and grow private-sector jobs in the U.S.
We see a host of laws, regulations and other
policies being enacted that impose a government
prescription of how individual industries ought
to be structured, rather that produce an environ-
ment in which the private sector can innovate,
invest and create jobs in this global economy.
In our judgment, we have reached a point
where the negative effects of these policies are
simply too significant to ignore. In the search for
short-term revenue fixes, we’re doing long-term
damage to economic growth.
By reaching into virtually every sector of
economic life, government is injecting uncer-
tainty into the market place and making it harder
to raise capital and create new businesses.
The Riddle of the Roth IRA
By: Roger M. Shorr,
From Barron’s June 28, 2010 issue
PAY THE TAX MAN NOW, or pay him later?
Millions of upper-income households be-
came eligible this year to convert their traditional
Individual Retirement Accounts to Roth IRAs.
Before 2010, those with modified adjusted gross
income in excess of $100,000 couldn’t make such
conversions.
Confusion exists about the advantages and
disadvantages of Roth conversions. But if inves-
tors don’t solve the conversion riddle, the result
could be hazardous to their wealth.
Switching to a Roth usually means paying
income taxes up front, based on the taxable value
of a traditional IRA, instead of paying taxes on
retirement income from the IRA. After convert-
ing, investors who are at least age 59 1/2 will
have a tax-free source of retirement income un-
der most circumstances.
Investors trying to maximize net income
from their IRAs in retirement should focus on
their effective tax rates resulting from two very
different situations: Taking money from tradi-
tional IRAs in retirement, or converting those
IRAs to Roth IRAs now.
The Effective Tax Rate rule compares the
ETR on a Roth IRA conversion to that on
money taken from a traditional IRA in retire-
ment. The rule assumes that the IRAs are in-
vested the same way, that Roth withdrawals are
tax-free and that the same percentage of with-
drawals are taken from the IRAs and spent.
For example, if a $100,000 traditional IRA
is converted to a Roth IRA and creates $30,000
of tax, the conversion ETR is 30%. If 10 years of
$10,000 withdrawals from a traditional IRA in
retirement are expected to create $20,000 of tax,
the ETR on money taken is 20%.
Investors may pay conversion taxes from
the IRA itself, but for those under 59 1/2 this
could cause a 10% penalty tax. Or they may pay
the taxes from non-IRA money-this normally
produces significantly better results.
When using individual Retirement Account
money to pay the conversion tax, the ETR rule
determines which IRA will produce more retire-
ment income. The Roth wins if the conversion
rate is lower than the effective tax rate on retire-
ment withdrawals. The traditional IRA wins if
the opposite is true. (The rule assumes that the
taxes are withdrawn from the account at the time
of conversion. In fact, results may differ if the
value of the assets changes between the time the
taxes accrue and the time they are withdrawn.)
If a saver uses non-IRA money to pay the
conversion tax, the ETR rule functions a bit
differently. For this comparison, we must assume
that when not converting, a separate fund, equal
to the taxes saved, is invested and distributed
(Continued from page 5)
(Continued on page 8)
Data Source: Standard & Poor’s and Robert Shiller. Chart Deschaine & Company Research
Month End Dividend Yield for the S&P 500 Index
1880 to 2010 (Dividend Forecast to 2021?)
The Future of
Dividend Yields?

7. Year End 2009 Viewpoint Page 7
AnnualReturns 2nd Qrt
USMARKETS - 11.34
GLOBAL EX-US - 12.25
DEV MRKTS EX-US - 12.84
EMERGING MRKTS - 9.39
CORE BONDS 3.70
LT COMMODITY - 2.89
Source: Morningstar Q210 Market Com-
mentary
Market Summary 2nd Qrt 10
EQUITY INCOME
Portfolio
2nd Quarter 2010 Update
THE EQUITY INCOME
Portfolio current holdings
as of June 30, 2010 are shown
on thetabletothe left.
The second quarter of
2010wasone of thoseanomalies
of stock market behavior that
drives investors crazy. While a
host of companies across a
swath of diverse industries were
reporting decent, and in some
cases, excellent earnings, raising
dividends at a clip no one ex-
pected this soon after the credit
meltdown and hording record
amounts of cash, the S&P 500
went down 11.43% for the quar-
ter. That put the S&P 500 down
6.65% for the six months ending
June 30, 2010. But hey, that’s
the stock market for you, just
when you think it’s safe to go
into thewater,etc.
The good news so far in
2010 is the strong growth in
dividends. We anticipated com-
panies would boost dividends
given how much cash they’re
producing and how much cash
they’re holding on their balance
sheet, in excess of $2 trillion at
last count. And we’ve not been
disappointed.
So far this year , we’ve had
13 stocks increase their dividend
representing a 3.2% increase for
the quarter over the previous
periods payout, which is a 12.8%
annual rate of dividend growth
forthe stocksboostingpayouts.
We see dividend increases
continuing throughyear-end.
Equity Income Portfolio Dividend Data Update
Company Symbol
Recent
Price
Current
Yield
Cons Div
Increases
Div 5yr
Growth
Previous
Qrtly
Amount
New
Qrtly
Amount
%
Change
Div
Paid
Since Industries
Abbott Laboratories ABT 46.69 3.50 37.00 9.24 0.44 0.44 - 1926 Pharmaceuticals
Arthur J Gallagher & Co. AJG 24.29 5.30 19.00 5.48 0.32 0.32 - 1990 Insurance
Alliance Bern Global High Inc AWF 13.48 8.60 4.00 7.12 0.10 0.10 - 1993 High Yield Equity Fund
B&G Foods, Inc. Class A BGS 10.32 6.60 - - 0.17 0.17 - 2007 Food Products
Black Hills Corporation BKH 28.30 5.10 38.00 4.29 0.36 0.36 - 1942 Multi-Utilities
Bristol-Myers Squibb Co. BMY 25.63 5.00 - 3.54 0.32 0.32 - 1900 Pharmaceuticals
Colgate-Palmolive Co CL 78.77 2.30 47.00 12.90 0.44 0.53 20.45% 1895 Household Products
Clorox Company CLX 61.92 4.00 33.00 18.62 0.50 0.55 10.00% 1968 Household Products
ConocoPhillips COP 49.20 4.10 9.00 14.84 0.50 0.55 10.00% 1934 Oil Gas & Consumable Fuel
CPFL Energy Inc. CPL 69.31 6.20 - 101.14 1.99 2.30 15.37% 2005 Electric Utilities
Computer Programs & Systems CPSI 39.71 3.60 - 18.95 0.36 0.36 - 2003 Health Care Technology
Century Link, Inc. CTL 33.40 8.50 36.00 105.16 0.73 0.73 - 1974 Diversified Telecom
Chevron Corp CVX 67.56 4.10 19.00 10.88 0.68 0.72 5.88% 1912 Oil Gas & Consumable Fuel
Dominion Resources Inc. D 39.14 4.60 6.00 6.24 0.46 0.46 - 1925 Multi-Utilities
DuPont de Nemours & Co. DD 34.05 4.80 - 2.97 0.41 0.41 - 1904 Chemicals
Diamond Offshore Drilling Inc. DO 62.90 11.90 - 178.93 0.13 0.13 - 1997 Energy Equipment & Services
ENI S.p.A. E 37.88 5.20 - 11.39 1.07 1.00 -6.54% 1996 Oil Gas & Consumable Fuel
Consolidated Edison, Inc. ED 43.62 5.40 35.00 0.87 0.60 0.60 - 1885 Multi-Utilities
Elbit Systems Ltd. ESLT 49.29 2.90 4.00 11.92 0.36 0.36 - 1997 Aerospace & Defense
Energy Transfer Partners LP ETP 46.83 7.60 - 16.34 0.89 0.89 - 1996 Oil Gas & Consumable Fuel
EV Energy Partners, Units EVEP 31.70 9.50 2.00 - 0.76 0.76 0.13% 2007 Oil Gas & Consumable Fuel
Federated Investors Inc FII 20.39 10.90 - 69.56 0.24 0.24 - 1998 Capital Markets
Fifth Street Finance Corp. FSC 10.54 10.80 1.00 - 0.30 0.32 6.67% 2008 Capital Markets
Gladstone Investment Corp GAIN 6.00 8.00 - - 0.04 0.04 - 2005 Diversified Financials
General Mills Inc. GIS 35.81 2.70 6.00 9.15 0.25 0.28 14.29% 1898 Food Products
Great Northern Iron Ore GNI 95.65 9.60 - 0.82 2.00 2.75 37.50% 1990 Diversified Financials
Genuine Parts Company GPC 39.44 4.10 53.00 5.77 0.41 0.41 - 1948 Distributors
Glaxo Smithkline ADS GSK 34.13 5.80 - 6.61 0.46 0.46 - 2001 Pharmaceuticals
Health Care REIT Inc HCN 41.28 6.60 2.00 2.37 0.68 0.68 - 1990 Real Estate Investment Trust
H.J. Heinz Company HNZ 43.50 3.90 5.00 8.23 0.42 0.45 7.14% 1911 Food Products
Johnson & Johnson JNJ 59.08 3.40 47.00 11.18 0.49 0.54 10.20% 1944 Pharmaceuticals
Kraft Foods Inc KFT 28.25 4.10 8.00 7.26 0.29 0.29 - 2001 Food Products
Kimberly-Clark Corp. KMB 60.19 4.20 35.00 8.29 0.66 0.66 - 1935 Household Products
Coca-Cola Company KO 50.43 3.40 47.00 9.92 0.44 0.44 - 1893 Beverages
Linn Energy, LLC LINE 26.55 9.50 - - 0.63 0.63 - 2006 Oil Gas & Consumable Fuel
Eli Lilly & Co. LLY 33.91 5.80 42.00 5.94 0.49 0.49 - 1885 Pharmaceuticals
Main Street Capital Corp MAIN 15.44 9.70 2.00 - 0.13 0.13 - 2007 Capital Markets
Microchip Technology Inc MCHP 27.88 4.90 7.00 48.39 0.34 0.34 0.29% 2002 Semiconductors
Mercury General Corp. MCY 41.30 5.70 19.00 8.08 0.59 0.59 - 1990 Insurance
Altria Group Inc MO 20.54 6.70 - 15.66 0.35 0.35 - 1928 Tobacco
Middlesex Water Co. MSEX 15.67 4.60 2.00 2.71 0.18 0.18 - 1990 Water Utilities
MLP & Strategic Equity Fund MTP 16.30 5.20 - - 0.07 0.07 - 2007 Capital Markets
Maxim Integrated Products MXIM 16.75 4.80 7.00 16.65 0.20 0.20 - 2002 Semiconductors
Norfolk Southern Corp NSC 50.50 2.70 8.00 27.31 0.34 0.34 - 1901 Railroads
Realty Income Corp O 29.33 5.80 12.00 6.57 0.14 0.14 0.21% 1994 Real Estate Investment Trust
Paychex, Inc. PAYX 25.16 4.90 19.00 20.87 0.31 0.31 - 1988 IT Services
Pitney Bowes Inc. PBI 22.08 6.60 19.00 3.35 0.37 0.37 - 1934 Commercial Services
Plum Creek Timber Co. PCL 33.51 5.00 - 2.59 0.42 0.42 - 1989 Real Estate Investment Trust
PepsiCo, Inc. PEP 61.64 3.00 38.00 14.14 0.45 0.48 6.67% 1952 Beverages
Procter & Gamble Co. PG 59.34 3.00 56.00 12.91 0.44 0.48 9.50% 1891 Household Products
Progress Energy Inc PGN 39.82 6.20 9.00 1.26 0.62 0.62 - 1937 Electric Utilities
Philip Morris Intl PM 46.77 5.00 1.00 - 0.58 0.58 - 2008 Tobacco
Pinnacle West Capital PNW 36.74 5.70 - 2.32 0.53 0.53 - 1993 Electric Utilities
Reynolds American Inc RAI 53.08 6.70 - 13.81 0.90 0.90 - 2004 Tobacco
Southern Company SO 33.50 5.30 8.00 4.11 0.44 0.46 4.00% 1948 Electric Utilities
AT&T Inc. T 24.41 6.80 19.00 5.36 0.42 0.42 - 1881 Diversified Telecom
Integrys Energy Group TEG 44.12 6.20 51.00 4.56 0.68 0.68 - 1994 Multi-Utilities
UIL Holdings Corp UIL 25.23 6.80 - - 0.43 0.43 - 1900 Electric Utilities
Unilever PLC ADR UL 27.19 3.50 10.00 6.15 0.27 0.28 1.69% 1999 Food Products
Vector Group Ltd. VGR 17.30 9.20 11.00 5.10 0.40 0.40 - 1990 Tobacco
Vectren Corporation VVC 23.34 5.80 34.00 2.98 0.34 0.34 - 1946 Multi-Utilities
Verizon Communications, Inc. VZ 26.61 6.60 5.00 4.48 0.48 0.48 - 1984 Diversified Telecom
Wayside Technology Group WSTG 8.65 6.90 - 5.56 0.15 0.15 - 2003 Electronic Equipment
Aqua America Inc WTR 17.85 3.20 19.00 8.31 0.15 0.15 - 1939 Water Utilities
QWest Communications Q 5.27 6.10 - - 0.08 0.08 - 2001 See Note Below
Deschaine & Company, L.L.C.

8. Page 8 Deschaine & Company, L.L.C.
WorldHeadquarters
128 South Fairway Drive
Belleville, Illinois 62223
Phone: (618) 397-1002
MaryvilleOffice
(618) 288-2200
HighlandOffice
(618) 654-6262
similarly to the IRA.
It’s still true that when the conversion ETR is lower than the pro-
jected rate on withdrawals from the traditional IRA, converting is nor-
mally advantageous. But even when the expected tax rate is lower on tradi-
tional IRA withdrawals, converting can still be beneficial. If the separate
fund for taxes were itself tax-free, the ETR rule would operate virtually
the same as if conversion taxes were being paid from the IRA. But since the
separate fund is taxable, the advantage goes to the Roth.
Another difference is that the Roth can become more advantageous
over time because taxes slow the growth of the separate fund, so time be-
comes a factor in the conversion decision. The longer a Roth is owned, the
longer it can accumulate earnings tax-free. The ETR remains the key: the
lower the rate on withdrawals, the less advantageous converting becomes.
It can even become a losing proposition.
How can investors know their future tax rates? They can’t. Congress
makes the laws and nobody can be certain what future lawmakers will do
about Roth IRAs. But everyone should know that the long-term fiscal
outlook for the U.S. will require more tax revenue, pending cuts or both.
A distinct minority of Americans has significant savings, and a dis-
tinct majority believes in progressive taxation. This means that rich people
with big individual Retirement Accounts are likely to see higher tax rates,
perhaps a lot higher. Even so, some retirees live frugally on retirement
incomes considerably smaller than their employment earnings. Other re-
tired people may have very large deductible medical bills, or other deducti-
ble expenses sufficient to offset the taxable income from withdrawals from
a traditional IRA. Such expenses aren’t deductible against tax-free Roth
IRA withdrawals, so the deductions could be lost. Also with years to plan,
some people may find legitimate tax shelters. And they may be in a lower
tax bracket, even if all brackets are raised, resulting in a lower ETR on
retirement withdrawals.
Some possible advantages of converting:
1) Roth IRA conversions may be especially advantageous for well-
heeled people who don’t need their IRAs for retirement income. With-
drawals from traditional IRAs must begin no later than April 1 of the year
after one turns age 70 1/2. Roth IRAs may be held without withdrawals
during the original owner’s (and spousal beneficiary’s) lifetime. This means
more money could stay in the Roth, compounding income tax-free for one’s
heirs. However, a Roth, like a traditional IRA, may be subject to estate tax.
2) Currently, tax-free Roth withdrawals aren’t’ considered in deter-
mining if Social Security retirement benefits are taxable. And they don’t
affect Medicare Part B premiums.
A few possible disadvantages of converting:
1) Roth conversions creating taxable income could increase Medicare
Part B premiums or cause Social Security retirement benefits to be taxed
for the year of the switch or both.
2) Converting to a Roth now could cause the loss of a tax-free conver-
sion in some later year. For example, a business owner experiencing losses
might be able to use them to offset the taxable income created by a Roth
conversion. The result could be a totally tax-free conversion and tax-free
income later.
A cautious investor needn’t go all the way. He can convert a portion of this
traditional IRA to a Roth. This could produce a better outcome if his esti-
mate of future tax rates proves to be a lot different than what materializes.
One big caveat: the best-laid plans of mice and investors may go
astray. Every IRA investor’s situation is different, and no one should make
important financial decisions without knowing how the law applies to him
individually. Seek a financial professional’s help before taking any action.
The definition of “Ironic?”
Every year Warren Buffett auctions off a lunch with him to the highest
bidder. The money goes to charity. This year the auction raised a record
$2.11 million. Obviously, Buffett’s incredible investment record attracts
those looking for some special insights into his investment strategy. This
year his insight should be easy: “Never pay $2.1 million, to have lunch with
anyone, including me!”
As always, thanks for reading. MJD
(Continued from page 6)
PUBLISHER: MARK J. DESCHAINE EDITOR: JOHN H. DESCHAINE CONTRIBUTING EDITOR: TOM O’HARA STAFF CONTRIBUTORS: MATT POWERS, JASON LOYD COPY EDITOR: MARNIE E. DESCHAINE TECHNICAL ADVISOR: Joseph M. Deschaine. VIEWPOINT is a
complementary publication of Deschaine & Company, L.L.C. a registered investment advisor in Belleville, Illinois. This information has been prepared from sources deemed reliable, but its accuracy is not guaranteed. It should not be assumed that any
securities discussed will be profitable or will equal past performance, or is it an offer to buy or sell any security mentioned. Deschaine & Company and/or one or more of its clients, employees, family or friends may have a position in the securities dis-
cussed herein. © 2010. All rights reserved. Reproduction of this publication is strictly forbidden without written consent from Deschaine & Company. This issue was published on July 20, 2010. If you would like to receive a complementary copy each
quarterly, simply send us your address and the preferred method of delivery: snail-mail or email, to: 128 South Fairway Drive, Belleville, IL 62223 Or email us at mdeschaine@charter.net and we would be happy to add you to one of our mailing lists.
Deschaine&Company,L.L.C.
“Most bad government has grown
out of too much government.”
— Thomas Jefferson.
Page 8