A recent USA Today article titled "The Dow's 2-year trip to nowhere" made the case that investors in the Dow Jones Industrial Average have essentially treaded water over the past couple of years.
"The Dow, based on [the Oct. 26] close is just 175.16 points higher than it was 22 months ago. Not to depress long-term investors, but that equates to a price gain of just 0.97%, which means investors have seen the Dow grow at an annual pace of 0.5% the past two years," according to the article.
This is disheartening news for investors, particularly those who are attempting to build long-term wealth.
Paltry price gains, coupled with high daily volatility, lead some investors to allocate assets to more conservative asset classes. In essence, if returns for stocks are so low, why experience the volatility in the equities market?
Although the USA Today article was factually correct, it painted an incomplete picture. The problem with simply considering index values is that another source of return -- dividends -- is completely ignored.
Dividends, particularly amid low interest rates, play a significant role in the return from market indices, particularly the Dow industrials.
Although the price return may have been 0.97%, the total return from the Dow industrials over that period including dividends is 6.92%, nothing to write home about but a far cry from the 0.97% cited in the USA Today article.
When stock prices are rapidly advancing such as was the case in the 1980s and 1990s, investors tend to overlook the somewhat hidden return provided by dividends. During those decades, the price return overwhelmed the return provided by dividends.
On the other hand, the 2000s have often been labeled as a lost decade for stocks. As bad as it was, without the return provided by dividends it would have been downright miserable.
Dividends represent a major portion of investment returns. Unfortunately, investors tend to solely focus on stock prices when judging the performance of their investments.
No one says, "I doubled my money. My investment went from $55 to $100, and I collected five dividends of $2 each."
When stock prices are falling or stagnant, investors can take some comfort in the dividend returns provided by their stock investments.
The dividend yield on the Dow industrials is 2.39%. At a time when 10-year Treasury securities are yielding less than 2%, that is nothing to sneeze at.
This article is commentary by an independent contributor. Robert R. Johnson is chief executive and president of the American College of Financial Services.