Share of Total Return Definition Monday, October 6, 1:37 PM ET
Many studies have shown the importance of dividends to total stock market returns. A recent study published by Morgan Stanley breaks out some illuminating statistics, looking at the S&P 500 by decade. Overall, the report concludes that dividends have accounted for more than 40% of total market return since 1930. But looking at certain decades, the importance of dividends is even more glaring.
In the 1930's, share prices fell by an annualized 5.3% per year. But offsetting that decline was an income return of 5.7% per year. In other words, if it were not for dividends, investors would have suffered a negative total return for the decade. And if those dividends were reinvested at bargain prices during the 30's and 40's, investors were rewarded handsomely during the 1950's with annualized price gains of 13.6%.
In the 1970's stock prices performed poorly again, with annualized price appreciation of just 1.6%. But income return was 4.1%/year, driving a total annual return of 5.8% during the decade. Like in the 30's and 40's, investors again had the opportunity to reinvest dividends at bargain prices during the 70's, and then saw those investments pay off in the 80's and 90's when share prices gained an annualized 12.6% and 15.3% respectively.
The 2000's saw share prices fall by 2.7% per year, and during the Great Recession investors could once again reinvest dividends at bargain prices. Time will tell what future decades have in store for investors, but one thing this data makes clear: investors should not underestimate the importance of dividends.
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