Sunday, December 18, 2011

Stop reporting index returns without including dividends

It is frustrating to see sloppy financial reporting, particularly from professionals. Here is an example.
Reuters: The benchmark S&P 500 index is down about 3 percent for the year and would need to climb above 1,257.64 in order to end higher for the year.
Another example from Bespoke Investment Group:

Wrong. S&P 500 is down 1% not 3% because we had 2% worth of dividends this year. 2% may not seem like much, but to put things in perspective, the 10-year treasury yield is 1.85% and the 5-year treasury yield is 0.8%.  Dividend can not be ignored for a developed economy like the US, particularly when comparing returns with emerging market nations such as Namibia.

Dividend yield is also a good indicator of the relative value of equities in a developed economy. In fact the two percent can be viewed as another bullish indicator. The chart below shows the ratio of the S&P500 dividend yield to the 10-year treasury yield over time - we are near recent highs.This makes high dividend stocks particularly attractive.

Ratio: (S&P500 dividend yield)/(10-year treasury yield)
Some may argue that treasuries are overpriced thus distorting this ratio, but it is highly unlikely that treasuries will sell off significantly in the near term without a rally in equities.

So to all the financial journalists out there, please do your homework when reporting/comparing index returns.  In a slow growth, low rate environment like we have in the US, dividends can be a major component of stock returns and represent cash in shareholders pockets.
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