Like a Hollywood star who gets all the attention on the red carpet, stock market commentators are incessantly talking about the current price of the stock market.
Interestingly enough, the power of the stock market isn’t where the price is on any given day, the secret is where most people aren’t looking. And the accompanying chart proves it.
Stock market price returns and total returns offer distinct perspectives on investment performance. Price return measures the change in price over time, reflecting capital gains or losses. Total return encompasses both price changes and any income generated, such as dividends or interest, providing a more comprehensive view of investment profitability.
Over the years, the stock market’s price returns have captured attention, especially during periods of rapid growth or decline. However, solely relying on price return overlooks the significant contribution of income generated from dividends.
Over the last 34 years, an initial $100k portfolio that incorporates dividends (total return) has grown to more than double what a price-return-only portfolio grew to.
In two words, Dividends Matter.
Total return, incorporating dividends and other income, provides a more accurate representation of an investment’s overall performance.
The only difference between the total return and price return lines is the power of reinvesting dividends over time.
While price returns offer valuable insights into short-term market movements, total returns provide a comprehensive view of investment performance. Investors seeking to build wealth over the long term should prioritize understanding and optimizing total returns to achieve their financial objectives.
-Paul R. Rossi, CFA