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The DJIA numbers are higher than they’ve ever been. How does the ‘real value’ compare to the ‘real value’ of the highest number before the crash?
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ISTR some index hit 2,500 in the mid-'80s, and it was a big deal at the time. Which one was it?
The Dow peaked around 2600 in '87, and the S&P 500 passed 250 sometime in the mid-80s.
Here is an article about the inflation-adjusted value of the Dow.
Here is a graph that shows the CPI against the DJI with Jan 1, 1980 as the baseline for both graphs.
You can go to the FRED web site and create your own graphs like this. It took me about 15 minutes to find the correct data categories, but once you do that, editing the graphs to put in a baseline or even log scale is easy peasy.
Here is another inflation adjusted chart, looks like we are still lower than in 2000 or 2007. (As of May 2013 which was 345 points lower than today)
Be aware that stock indexes do not include dividends. An index that rises 5% while paying 2% dividend has actually returned 7%. Over time, the difference between the value of a bundle of DJ-30 stocks, and the same stocks with dividends reinvested will be huge. IMO, that the many graphs and data sources for DJIA etc. do not assume dividend reinvestment makes them almost useless for the grand comparisons people like to make.
Here is a graph I found with Google from this site which shows an inflation-adjusted index and the same inflation-adjusted index with dividends reinvested.
There are indicators and even, I think, tradeable shares which assume dividend reinvestment. But I don’t see such a data set at FRED.
I’m not sure how valid that is though since you can then make the same argument regarding fixed income investments. If you put $1000 in a CD at 5% and reinvest the interest, after 100 years you have a lot more than $1000 dollars.
Aside from that, companies that pay dividends tend to be mature companies in mature industries. IOW, reinvesting all of the profits of the business IN the business is no longer justified by the marginal rates of return available from prospective ventures. So it’s not appropriate to make comparisons between growth companies that typically do not pay dividends since they DO have such opportunities and mature companies that tend not to.
If you want to try to capture the distinction, it would probably be better to use indices that focus on the types of stocks that have the characteristics you want - so the DJI for mature dividend paying stocks maybe or possibly the NYSE or maybe even the SPY and maybe QQQ or Russell 2000 or similar for growth/small cap.
I’m not sure you understand the point. Your first sentence agrees with my point: CD’s are described by their interest return (whether compound or simple just reflects whether you graph aggregate or change) and not by price which will usually “change” from $1000 to $1000 over any period.
Whether a given investor actually reinvests his dividends or not is immaterial to his understanding of total return. I repeat the essential point: A 3% dividend stock gaining 5% in price outperforms a non-dividend stock that gained 7% in price. Stock indexes do not reflect this. Distinguishing different types of company has no effect on this simple fact.
Companies’ decisions on dividend levels have changed over the years, in response to their particular business or to tax considerations. This just makes it more important to consider dividends when trying to get a full picture.
Your conflating the 2 aspects of the investment though. You should be taking that 2% dividend and treating it as a separate income stream just as you would interest income. When comparing equities, you should be comparing price appreciation. Otherwise, I can compare $100 invested in 1871 at the dividend yield rate assumed for the DJI as if it were a fixed income investment and get basically the same numbers since you will notice that without that reinvestment, 100 years later, the line has barely moved above 100.
Now you can reply that is precisely your point, but hope you wouldn’t because it would assume a false dichotomy, i.e., that no fixed income investment could have produced the same returns. Are you starting to see the distinction?
So by trying to capture the dividend yield component of dividend paying stocks, you are actually confounding the issue and not clarifying it. If this were a useful approach, don’t you think there would be a metric for capturing this information? Of course there would be - there’s not. You can find a stock’s dividend yield for any given point in time, but that’s it.
This is basically correct. A funny thing happens when you examine the dynamics of equities that pay dividends that is obscured by looking at indices that incorporate large numbers of stocks (like the S&P500). While indices can be thought of as earning dividends at a continuous rate, for individual equities, dividends are normally paid on specific dates known well in advance (e.g. quarterly).
For equities that pay dividends, on the ex-dividend date, the per-share price of the equity usually jumps by very nearly the exact amount of the dividend. This is because if you buy before the ex-div date, you get a guaranteed payment of the dividend in the near future, while if you buy after you will not get that payment, so even if the company is just as valuable, the equity is worth that much less. So the stock price is subject to these periodic jumps.
If you include reinvestment of the dividend (i.e. assume that the dividend is going to be reinvested immediately in additional shares of the equity), the dynamics of the combined equity+dividend loses the jumps and becomes similar to a dividend-free equity. It’s clear that a meaningful comparison between the two can only be made with reinvested dividends.
This is absurd.
An equity that both appreciated in price and also paid dividends had a better rate of return over that time period than an equity that appreciated in price by the same amount, but paid no dividends. You can’t get an honest appraisal of stock performance by considering the price appreciation and dividend payments separately. The figures must be combined.
The same is even true of fixed income investments. Bonds can be bought above or under par, and the yield to maturity calculation accounts for the actual principal repayment on maturity, which could be higher or lower than the purchase price, while also assuming reinvestment of the coupon payments.
No one in their right mind would compare the long-term performance of stocks and bonds in that manner.
If we’re curious about stock performance when reinvesting dividends, then we would make similar assumptions when thinking about bonds. As I already said, even something as typical as a yield to maturity analysis assumes that coupon payments are reinvested. It’s the most natural thing in the world to continue in that same vein over longer time periods when rolling over the bonds.
Total Return from Investopedia.
Calculating Total Shareholder Return from Qfinance
Total Stock Return Formula from Accounting World
Some companies like Intel even provide Total Return Calculators for their historical performance on their own websites, with the option to reinvest dividends in the calculation.
This USA Today article explains in slightly more depth, as well as pointing the way to another website that provides this information. There are easy step-by-step instructions to find the info from Morningstar.com.
There are others. We can go to a website like Ycharts to get the total return calculation. The example I just cited is AT&T. As they explain on that page:
The reason why future information isn’t available, of course, is that companies are under no legal obligation to make dividend payments and there is no contractually determined price of stocks, as there is with bonds. But when evaluating past performance of stocks, some variety of total return is the only sensible method.
The original question was comparing historical stock market performance not the performance of individual equities and that’s what I was addressing. If I have to actually qualify everything I say because people are too stupid to understand the context, that’s not my problem.
By the way, this quote shows you completely missed the point I was making. Perhaps you’d like to try again?