We've all heard the stories. $100 invested in shares of P&G in 1932 would now be worth over $1 million! But if that's true, why is the Dow, which started in 1896, only at a level of 50,000, which it crossed for the first time in history yesterday?
The answer is because it, and the S&P 500, and any other "index" you might be familiar with, are only price indexes. And when companies pay dividends, their share price declines by that amount. So for instance, shares of Pfizer opened 43 cents lower last month when they went ex-dividend. Similar story for Verizon and AT&T.
While this might not sound like a big deal, over time, it results in a huge disparity between how well "buy and hold" investors actually do, versus "how the price looks on a chart." This is only true if you reinvest the dividends back in the index, but that is what most ETF investors and 401(k) holders are typically doing.
How big a difference does this make over time? The S&P Dow folks actually have a "total return" index that lets you check (select "total return" from the drop-down menu), although its data is shorter-term. Still, if you started reinvesting dividends in 1987, when its tracking began, the Dow would actually be at 127,730 as of yesterday!
Researchers have gone even further back. In 2016, they estimated that if you could have reinvested dividends starting in 1926, the Dow would be closer to 672,000. I asked Gemini to update that to 2026, and because of the strong returns we've seen over the past decade, it reckons that level would now be 2.1 million.
So let's go all the way back. What if you bought the Dow Jones Industrial Average upon inception in 1896 and held it until today with dividends reinvested? (Of course, none of this was possible until the 1970s, when John Bogle at Vanguard launched the first index fund.) The answer, Gemini thinks, would be 10.8 million. Let that sink in for a moment.
My point is, you are doing way, way better holding any of these indexes over the long run than the price level alone tells you. If you're in any kind of actively managed fund, you might also want to make sure the manager is comparing their performance against the market's total return, not price return, to justify their fees.
And yes, you have to pay taxes on the dividends, and yes, inflation eats away at the "real" return, and so on. But to pick another way of illustrating how powerful this "hidden" performance is, the best performing stock in the S&P 500 since its inception in 1957 is not a "growth" or "technology" stock, but Altria (Philip Morris). $100 invested back then would be worth over $5 million today, because of its extremely high dividend yield.
So yes, the "price" to buy the Dow or the S&P 500 at any given moment is the one you'll always hear about in the headlines. But if you're actually holding these indexes, your total return over the years is probably much better than you've even realized.
Kelly