A basic concept that many investors fail to grasp is that there are two separate components to equity returns. The first is capital appreciation — in other words, any rise in the price of the stock over time. The second component is dividend income — or the amount of profits paid out by the company in the form of dividends.

To suggest that either component is anything more than part of the return is completely misleading. The only truly meaningful figure is the total return, or capital appreciation and dividend income combined.

Unfortunately, this is one respect in which the investing industry and the financial media mislead investors all the time. Why? Because with only two exceptions (Germany and Brazil) of those studied for this report, all of the world's major equity indices are price-only indices, which reflect increasing prices but totally ignore dividend income.

A Serious Omission

The chart below shows just how serious an omission that is. Between March 5, 1999, and December 31, 2023, the S&P 500 index had a price return of 282.61%. But the total return was 508.32%. The contrast between the price return and the total return of the Dow Jones Industrial Average over the same period was even greater — 298.10% compared to 606.74%. That's a vast difference.

In fact, if you look at the annualized returns of those two indices, you can see that, on a price-only basis, equity returns were little better than bonds — i.e. 5.55% for the S&P 500 and 5.72% for the Dow Jones. The annualized total returns were far more impressive — 7.54% and 8.19% respectively. (*3/5/1999 is the founding date of Index Fund Advisors, Inc.).

But the discrepancy between price return and total return is even greater when you zoom out and look at the global picture. As the second chart below shows, the difference between the two figures in every other major market around the world is even greater than it is in the U.S.

In Australia, for example, between September 11, 2008, and February 29, 2024, the S&P/ASX 200 had a cumulative price return of 57%. But the total return was 203%. In Italy, the over the same period, the FTSE MIB price index was up just 16%, but the cumulative total return was 104%. Remarkably, in Spain, the price return of the BME IBEX 35, was negative, at -11%, but the cumulative total return was positive, at 81%. (*Starting date based on the earliest common inception date).

What's the Problem?

So, large as they are, why do these differences matter so much? Why is it such a problem that indices like the S&P 500 and the Dow Jones are price-only indices?

The simple answer is that there is overwhelming evidence that investors' interests are best served by simply buying and holding broad market indices and reinvesting any dividends they receive. Investors should therefore be able to see, clearly and easily, the returns that buy-and-hold investments in these major indices would have produced over different time periods. Unfortunately, in most cases, they can't.

Frustratingly, the total-return figures for most indices are in fact available, but you have to go looking for them. If, for example, you search "S&P 500 return" on Google, it's almost invariably the price return that comes up as the default.

Why Can't We See the Full Picture?

Of course, the investing industry doesn't want you to "invest and relax" as IFA suggests you should. It makes very little money out of investors who just buy and hold index funds and reinvest the dividends.

For example:

• brokerage firms want you to trade so they can receive commissions and make a profit on the bid-offer spread;
• fund managers want you to invest in actively managed funds, which charge much higher fees than index funds; and
• investment consultants want you to think that they have the expertise to identify the right funds to buy and sell, and at just the right time whenthey almost certainly don't.

The financial media also has its own incentives. The reason why media outlets rarely extol the benefits of buy-and-hold indexing is that doing so wouldn't generate enough clicks or advertising revenue. They know that readers are far more likely to click on stories suggesting there are shorter cuts to wealth.

To put it another way, both the investing industry and the financial media have a vested interest in not showing you the whole picture.

Even Professionals Get It Wrong

No wonder, then, that so many investors fail to understand the difference between price return and total return. In fact, even some professional investors and well-known commentators have been known to confuse the two.

"Beating the market is easy," Wall Street Journalist columnist Jason Zweig wrote in 2011. "Just understate its performance.

"Various investment promoters (tout) their stock-picking prowess by comparing their returns, including dividends, to the S&P 500 stock index without dividends. It is a lot easier to beat the market when you don't count its entire return."

By way of example, Zweig cited an email he had seen, urging readers to subscribe to Action Alerts PLUS, a stock-tip service from The Street's co-founder and CNBC host Jim Cramer. It was sent out under Cramer's name, with the subject line "My portfolio is CRUSHING the S&P 500." That sounds pretty categorical, doesn't it?

Unfortunately, the returns quoted in the Action Alerts email included dividends for Cramer's portfolio and excluded them for the S&P 500. Once taxes and the cost of the subscription were factored in, Zweig pointed out, investors would have been better off just buying and holding the S&P 500.

Takeaways for Investors

In summary, then, stop focusing on the price return. It only tells us part of the story. It's the total return, including dividends, that really counts.

Secondly, learn to be more skeptical about claims of long-term outperformance. When a fund manager or advisor says they've beaten the index over a period of ten years or more, check that they're comparing apples with apples. Specifically ask, are they including dividends in their own returns but excluding them from the index return?

Finally, why not help us in our efforts to make total return the global default by signing our petition?

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ROBIN POWELL is a financial journalist and editor of The Evidence-Based Investor.

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This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal.  For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.