One of the things that is often overlooked in trading is the role that dividends play in wealth creation. I have posted before about the role of DRP schemes in bulking up returns over the long term and since it is a blisteringly hot day in Melbourne (actually too friggen hot to get in the pool) I thought I would take a broader look at the role of dividends in returns. The chart below shows the differential between the All Ordinaires price index and the All Ordinaries TR index.
It is obvious that the TR index outperforms the price only as you have a higher annual rate of return. Plotting the difference between the two demonstrates how much this is worth in dollar terms.
The role dividends play in returns is universal however they do vary in terms of the overall contribution they make. Consider the chart below of the S&P500 versus the S&P500 TR
This appears to be the standard comparison between price and total returns with total returns trumping price. However when I begin to look at the inter-market differences some interesting things pop up. The chart below simply shows the price only comparison between the All Ordinaries and the S&P 500.
From this graph it looks as if the S&P 500 has always outperformed the All Ordinaries. However, this is an artefact of the starting date – if I have chosen a different starting date I would get a different result for parts of the chart. The chart below looks at the TR values for both indices.
You can see that this is a much more even race since it reflects the higher average dividend yield of the All Ordinaries versus the S&P500. If subtract the price index from the TR index for both to get a sense of the true contributions of dividends to long term compound returns I get the following.
From this, you can see that the All Ordinaries has, for the most part, outperformed the S&P500 in terms of dividend return. My guess is that if yields had not experienced periodic collapses such as 1987, 1993, 1996, and 1997 then the result today would be different. What is apparent is that over deep time the higher average dividend yield of the local market 4.2% versus an average of about 2.5% for the S&P500.
However, none of this is a directive to simply go and buy things and hope for the best, this is just a thought experiment to complement the stuff I have already written on DRP.
