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The Power of Dividends

| February 08, 2016
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When we look at "The Markets" - what exactly are we looking at?

Most of us are familiar with the Dow Jones Industrial Average ("The Dow"), The Nasdaq Composite and The Standard & Poor's 500 Index to name a few.  But what the numbers we see fail to recognize is the dividends that are paid by the companies in the indexes.

Those dividends are a powerful component of investor return over the long run.

Below is a quote from the  Wall Street Journal "Intelligent Investor" Column from March 2, 2012, by reporter Jason Zweig, regarding

"Dow 1,339,410: The Latest Milestone":

"...The Dow industrials, since their launch on May 26, 1896, have been reported as a "price-only" index that doesn't capture the dividend income of the underlying companies. The same is true for most major stock indexes.

So I asked Meir Statman, a finance professor at Santa Clara University, and Jonathan Scheid, president of Bellatore Financial, an investment firm in San Jose, Calif., to calculate where the Dow would be today with all dividends reinvested back into the index. Counting dividends, the Dow would have closed this Tuesday at 1,339,410.97—more than 100 times above its official close".

When discussing long-term historical returns Mr. Zweig concludes:

"There has never been a better time to be an individual investor. You often have heard that stocks have returned better than 9% annually since 1792. But for more than 180 of those 220 years, it was impossible for small investors—and many institutional investors, for that matter—to capture the total return of the stock market".

So if history is any guide (and it's about the only guide we have), there is a persistent and historical case for optimism when planning for retirement.

 

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