In the last 40 years, 71% of the market’s return came from dividends…fact checking

magic hat imageThis claim came from Kevin O’Leary when promoting his new dividend-centered ETF. Mr O’Leary stars in a TV show where they put him in a tank full of sharks or something like that. While the statistic might be inspirational in starting a dividend investing strategy, I couldn’t resist taking a closer look and doing some fact checking.

I originally came across this article over at the Bogleheads Forum which has much more detailed commentary on the article as might be expected.

One school of investing thought argues that dividends are irrelevant in terms of total return. Saying they’re irrelevant doesn’t mean that dividends are bad or to be avoided. It’s like someone saying “I measured the average speed of 2,000 cars at random and on average, red cars seem to go faster than blue cars. My next car will be red so that I can get around town faster.” Was the paint color really the most important factor? Or was it other factors, like the driver, the engine performance, more cars of one color being located in more congested areas or the age of the car etc.? Either way, red cars aren’t bad but a personal preference.

Anyway, I digress.

There’s also nothing fundamentally wrong with OUSA, Mr. O’Leary’s  ETF which is being promoted in the Forbes interview. However, if you do watch his video explanation, at least keep an open mind. He also argues that non-dividend paying stocks no have monetary value. In the real world, ownership of a profitable non-dividend paying company is actually worth something. Just ask Mr. Buffet for some free BRK.A shares.

OUSA aims to hold at least 20 stocks over at least 5 sectors (it currently holds ~153 stocks) and it favors ‘lower volatility’ companies. It aims to reduce volatility via a low allocation to the Energy and Financial sectors and a high allocation to Technology and Consumer Defensive sectors. It pays an average 2.3% yield.

I am personally not interested in it because of the 0.48% fees but that’s just me.

However, I am interested in the math. How did he arrive at that number since there’s no citation mentioned? And can I reproduce it? It’s time for some fact checking.

Calculating total return vs price return

The following chart shows the effect of re-investing dividends vs spending dividends in VFINX, which I’m using as a real-world equivalent of the virtual S&P 500 index. I could only get dividend data from Yahoo starting in 1980 so the calculations below are based from the 1 Jan 1980 to 31 Dec 2016.

Comparison of growth of $10,000 of VFINX with dividends re-invested vs not re-invested

If you had invested $10,000 back at the start of 1980, you’d have over $403,000 at the end of December 2016 if you’d re-invested all the dividends. Had you not re-invested them, your portfolio would be worth only $146,000.

A simple calculation shows:

Total Value with dividends re-invested: $403,188

Total Value without dividends: $146,155

“Dividend-only” amount of Total Value: $403,188 – $146,155 = $257,032

Percentage of Total Return due to Dividends: $257,032 / $403,188 = 64%

So, not quite 71%. My data is only from 1980 which is 36 years and not the forty-years mentioned. It’s fairly close and I’ll give Mr. O’Leary the benefit of the doubt!

Except that…

In reality, the above calculation doesn’t show “dividend-only” contributions at all. When dividends are re-invested, the new share purchases are also subject to capital gains (or losses). So a fairly large portion of the “dividend only” amount above includes capital gains from new shares purchased by the re-invested dividends. It’s a little disingenuous to include capital gains as part of a “dividend only” metric so let’s exclude that part.

In the above example, the total payments of dividends that were re-invested was $94,189. This number includes the compounding effect from a larger number of shares due to re-invested dividends. It’s a pretty awesome result from a $10,000 investment just on its own!

Let’s try the same math again:

Total Return with dividends re-invested: $403,188

Dividend only amount of Total Return: $94,189

Percentage of Total Return due to Dividends: $94,189 / $403,188 = 23%

So not such a great result, compared to the earlier 64%.

OK, I know the arguments. If the dividends weren’t re-invested, there wouldn’t have been the associated capital gains. This is all true, but it is still a fact that a significant amount of the return of those extra shares from re-invested dividends were due to capital gains.

One more time…

Given that the average dividend yield over that time period was about 2.8% and that the total return was about 10.8% it should be fairly intuitive that 70% of the returns couldn’t come from dividends alone. Dividend yields steadily decreased from around 5% in 1980 to around 2% in 2016.

Here’s one last example using the values above.

$10,000 at 10.8% CAGR grows to $401,265 in 36 years.

With 2.8% Dividends only, $10,000 at 2.8% CAGR grows to $27,024 in 36 years.

With 8.0% Capital Gains only, $10,000 at 8.0% CAGR grows to $159,681 in 36 years.

$27,024 + $159,681 = $186,705 and not the full $401,265.

Or in mathematical terms:

1.028^36 + 1.08^36 does not equal (1.028+1.08)^36

So any comparison where either dividends or capital gains are “removed” gives a misleading answer. Since we’re in the realm of shaky math, we could also simply divide 2.8 as a percentage of 10.8 and reach a result of 26% from dividends.

Are you getting a sense that none of these results are meaningful yet?

So which value is correct?

Well, if you’re trying to promote a dividend-focused ETF, then the first answer (64%) is better for obvious reasons!

However, neither answer matters because the percentage values are meaningless as part of an investing decision.

The results only demonstrate that:

  1. Some companies in the S&P chose to pay dividends.
  2. Dividend payments are a part of Total Return.

The more interesting question, “was the S&P total return higher because of those dividends?” can’t be answered by the total return calculations above.

Total Return is a combination of Capital Gains plus Dividends and it’s not so simple just to separate one from the other. If you plan to live off dividends then your “Safe Withdrawal Rate” is simply the same as the dividend yield. If this meets your income objectives in retirement then you’ve succeeded.

There are many dividend ETFs to choose from depending on your objectives. OUSA has higher than average fees and a dividend yield that’s not much higher than the market average.

Consider the source

More importantly however, when reading reports, investing strategies or even blog posts, consider the source of the article. Data can be presented in many different ways, some more misleading than others. Question the data and consider what the motivation behind the numbers might be. There are two sides to every story after all.

In this case, the purpose was to encourage investing in a dividend-based ETF by the fund owner who receives a percentage of the value of the assets being managed by the fund. By suggesting that dividends contribute a high percentage of total returns, you’re led towards concluding that the total return of the S&P was higher because of those dividends.

Be wary too of confirmation bias which is where you favor data to support your beliefs.

One more thing

Just for fun, here’s the performance of OUSA since its inception just over a year ago. I’ve compared it to a Total Stock Market fund (VTSAX) as well as to the Vanguard High Dividend Yield Index ETF (VYM) and the Vanguard S&P 500 fund (VFINX) as a benchmark.

Comparison of OUSA vs VYM and VTSAX from inception until January 2017Don’t read too much into the above chart since it’s only a short timeframe and past performance says nothing about the future. OUSA got off to a good start but is currently the lowest of the four investments. All three Vanguard funds have expenses below 0.10% giving them an automatic +0.38% yearly advantage over OUSA. Fees are important since they’re a continual drag on returns.

Quote of the Day

Just taking risks for risk’s sake, that doesn’t do it for me. I’m willing to take risks that I think are worth it, and I’ve worked so hard to make sure that I survive.

16 thoughts on “In the last 40 years, 71% of the market’s return came from dividends…fact checking”

  1. DL, I enjoyed your analysis on this topic. I think Kevin O’Leary is a good businessman, but clearly, he is off base with his assertion.

    That being said, dividends are very important. How did you calculate the capital gains portion? Were you assuming 1 share of 10,000 or multiple shares? I’m just curious, I’m a math guy 🙂

    Have a good day, looking forward to your future posts 🙂

    1. Hi Erik,
      Certainly he’s a good businessman and has encouraged many people to put money into his ETF. OUSA isn’t bad by any means, it’s just that there are better arguments to make if you believe dividends are important than this one based on a percentage of total return. Personally, I’ve not come across any evidence that dividends matter for total return, but I like their convenience for easily realizing income from investments.

      To calculate the values, I “purchased” $10,000 of the fund shares (696.36 @ $14.36) on 2nd Jan 1980. The value of these shares for every day from 1/2/1980 to 12/31/2016 was then calculated using the daily share price data from Vanguard (one day per spreadsheet row). I used the dividend payments listed in the Yahoo Finance history by date and merged each dividend per share amount into the appropriate row in the daily value list based on its payment day. Then it was just a case of multiplying the number of shares that day by the dividend per share, to get the total dividend payment. Finally I calculated the number of shares that the payment would purchase using the daily share price and added that back into the number of shares.

      Thanks for stopping by 🙂
      Best wishes,

  2. I’ve seen these numbers mentioned a lot and it just doesn’t make any sense to me. The comparisons just don’t make any sense. I guess the best comparison would be between reinvesting the dividends or taking the dividends as cash and calculating what each return would be but even then you’re comparing a case where you take advantage of additional compounding versus not. The only way reinvesting the dividends wouldn’t outperform the cash dividends is if the company goes under. Thanks for the deeper look at the numbers because it never hurts to fact check.

    1. Hi JC,
      Yes I agree – there are valid reasons for a dividend investment strategy, but this particular argument is really just an interesting statistic demonstrating the power of compounded return than a reason by itself. As you point out, if you’re withdrawing the dividends then at least you will have had the cash if the company were to go bankrupt. Although even that is comparing a case where money is being withdrawn vs money not being withdrawn so it’s not a true apple to apple comparison.
      Thanks for stopping by!
      Best wishes,

  3. Interesting analysis. I thought 71% of the market’s return came from Amazon. O’Leary seems like a bit of a creep and his deals are always the worst for the borrower. He does love the passive income stream so it makes sense he likes dividends and running funds.

    1. Hi D10,
      That’s the great thing about statistics I guess, you can make them say almost anything. I agree with you though – I’d have thought a lot of the market’s return over the last 20 years or so is from Amazon, Google and Apple stocks.
      If one had to buy a dividend ETF, then OUSA isn’t the worst choice to be made. But it’s far from the best and there are cheaper alternatives e.g. SDY.
      Best wishes,

  4. Interesting analysis DL. The fundamental analysis in favor of dividends is that it Always gives a positive return with the lowest volatility, compared to capital gains. There is a chart from Ibbotson on Part 1 of my investing series where I discuss this. What this does in practical terms is, the reliable periodic positive cash flow of dividends gives the investor a chance to acquire beaten down shares. Even if reinvestment is not done, Ned Davis research, which I also include in my series of articles shows, there is a slight long-term over-performance of dividend payers compared to S&P 500. The reasons are many, but there is a strong management incentive argument in favor of dividends as well that I have seen personally in my corporate career as a senior manager. However, it will still test investors to remain 100% invested in dividend stocks come what may, which is what I do, so you must endure the price volatility. But the steadily increasing stream of dividends gives a positive reinforcement to remain invested. This feedback mechanism is missing in an index fund though it very well might beat a DGI portfolio on total return but the volatility of 100% equity index is stomach-churning for most investors. So, most indexers balance out with some bonds in their portfolio, but once you do that, the same portfolio lags the 100% equity index. So, I feel DGI gives an investor confidence to stay invested for long term in equities, and gives a measurable feedback in the form of their growing passive income while giving a competitive total return. Psychologically, stable and/or growing dividends give a behavioral boost to remain invested to get maximum “time in the market” for long term total returns as well.

    1. Hi 10!
      Thanks for the detailed reply! I certainly wasn’t intending to disparage DGI which I think is a good strategy for holding individual stocks and which reinforces the buy and hold mindset. I was really just trying to investigate a claim about dividends contributing the most to the “market’s return” (i.e. the S&P 500). The implication in the original statement by Mr. O’Leary is that dividends contributed the most total return of the market, therefore you should buy his dividend-oriented ETF and you’ll beat the market too. I think it’s meaningless to try to separate out just the dividend portion of the S&P 500 and use that as an argument. There are better arguments to make about DGI than this one.
      Thanks for stopping by – I appreciate your insight.
      Best wishes,

      1. I never said or implied that you were against DGI, DL. Nor am I against indexing, which is a fine strategy as I mention in my articles. I also have nothing for or against O’Leary. I was merely pointing out why dividends are a dominant part of total returns. Over any 20 year rolling period, they have contributed over 61% of total returns as per Brandes study. In Part 4 of my Investing Series , I mention Brandes Institute study conclusions that support this (couldn’t attach the report as it is proprietary research). Your interpretation that reinvested dividends generate capital gains and so it should be interpreted as CG not Div is not the view of the financial research community. That’s because without the dividends, the inherent retention of capital equivalent to the dividend should have generated that much more capital appreciation, if all else is held constant. But that did not happen as the data showed. Valuations that ultimately drive CG have a poor correlation to cash balance in a company, so a portion of it being paid out as dividends has not materially impacted returns as per Ned Davis and Brandes studies.

        1. Hi 10!,
          I appreciate your response. Total Return is capital gains plus dividends and the fact we’re having this discussion suggests that it’s not easy to separate one from the other. The IRS classifies the increase in price from shares bought with re-invested dividends as capital gains when I sell them, and I’m content with that definition. But the calculation method yielding the 71% compares the return of a portfolio that has had money continually withdrawn (dividends not reinvested) vs the returns of a portfolio which has had zero withdrawal and that is comparing apples to oranges. It doesn’t compare the effect of the S&P 500 where dividends are paid to an alternate-universe where no dividends were paid.
          I agree with you that the overall growth should have been the largely the same if dividends were not paid, all other things being equal.
          Best wishes,

    1. Hi DFG,
      That sounds like a great plan to me! Hope your children appreciate the value of saving as they grow up!
      Best wishes,

  5. Wow! Thank’s for putting efforts into demonstrating that! I think most experienced investors know it doesn’t make sense, but very few took take to truly math the numbers! Like you said, each investment has its advantages, but one must be well-informed of it all.

    I will continue with my own strategy! 😉



    1. Hi Mike,
      Yes, I only meant to point out that this specific statistic is not useful to justify a dividend oriented strategy; it really just shows that dividends are a part of total return. Not every dividend paying stock in the total market is a good investment, after all. There are better and more valid arguments / factors in favor of dividend strategies.
      Best wishes,

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