Robin writes:
An aspect of investing that constantly surprises me is how obsessed we all our with stock prices. We’re always hearing and reading about the latest prices, and how much they’ve risen or fallen. All that matters, we’re often told, is the price you buy at and the price you sell at. But it patently isn’t true.
We mustn’t forget that there are two separate components to equity returns. The first is capital appreciation — in other words, any rise in the price of the stock over time. The second component is dividend income — or the amount of profits paid out by the company in the form of dividends.
To suggest that either component is anything more than part of the return is completely misleading. The only truly meaningful figure is the total return, or capital appreciation and dividend income combined.
Unfortunately, this is one respect in which the investing industry and the financial media mislead investors all the time. Why? Because with only two exceptions (Germany and Brazil), all of the world’s major equity indices are price-only indices, which reflect increasing prices but totally ignore dividend income.
Take the Dow Jones Industrial Average, for instance — arguably the world’s best-known stock index. At the time of writing it stands at 39,512. But that figure only reflects price appreciation. If dividends are factored in, the Dow is currently on the brink of a much larger milestone, as my latest article for index Fund Advisors explains.
Wall Street traders and market watchers love their landmark moments. When the Dow Jones Industrial Average hit 30,000 in November 2020, social distancing meant the celebrations were more muted than usual, but traders wearing “Dow 30,000” baseball caps still clapped and cheered. Then-President Donald Trump even held a press conference to mark the milestone.
There’s a good chance we’ll be seeing another Dow Jones landmark reached very shortly. With the index currently standing at around 39,500, those Dow 40,000 caps are probably already on order.
But what if we told you that the Dow Jones is not far off a much bigger landmark, Dow 100,000? Well, it is in fact true, and, at least in our opinion here at IFA, it’s worthy of an even bigger celebration than whatever’s planned for Dow 40,000.
The Dow, you see, is a price-only index. The price reflects the change in the market price of the index since inception, and it’s calculated by comparing the current price of the index to its price when the index launched. Crucially, though, it does not take into account the dividends generated by the companies that make up the index.
READ THE FULL ARTICLE HERE
ROBIN POWELL is the editor of The Evidence-Based Investor. He works as a journalist, author and consultant specialising in finance and investing. He is the co-author of two books, Invest Your Way to Financial Freedom and How to Fund the Life You Want, and his company Regis Media provides high-quality video content for advice firms and other financial businesses.
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