because this is just so fundamental.
if the graphs don't fully show up. go here:
http://etf-investing.indicart.com.ar/research/SP500_historical_real_returns.shtml
Historical prices for the Standard & Poor's 500 index can be obtained from websites like Yahoo Finance if we use the ^GSPC ticker, or Google Finance if we use .INX . Yahoo can even graph the series since 1950. Nevertheless, to study the real profitability of stock investments, it is useful to average and graph not just the price, but the effect of dividend distributions and inflation too. That is the purpose of this work.
Total Return
According to Standard & Poor's, the dividend component was responsible for 40% of the total return of the last 80 years of the index. If we are to analyze the historical profitability of stock investments, this portion cannot be neglected. Therefore, it would be interesting to graph and average the total return (meaning the increase in value if all dividends were reinvested) instead of the evolution of just price, as done in the following graph:
The effect of investing $1 in 1950 is shown, in one case with all dividends reinvested (orange curve), in the other without (blue curve). As can be seen, reinvesting all dividends would have produced about 8 times the return. Note that the y-axis is logarithmically scaled, for better appreciation of the earlier trends.
Inflation and Dividend-Distribution Trends
Phrases like "one dollar invested in 1926 would be $3000 today" are often heard regardless of the fact that a 1926 dollar has little relation with a 2007 dollar. To really evaluate how much can be earned through stock investments in a long period of time, it is interesting to have the effect of inflation extracted, by adjusting the intermediate results according to an index such as the Consumer Price Index published by the U.S. Department of Labor.
The following graph shows inflation per year, together with annual dividend distribution rates. Some interesting trends can be seen in both:
Inflation-Adjusted Data
Incorporating inflation data to total returns and relative prices produces the following inflation-adjusted graph of relative prices and total return:
Averages per Decade
The following table shows average annual results for each decade:
| Price Change | Dividend Dist. Rate | Total Return | Inflation | Real Price Change | Real Total Return | |
|---|---|---|---|---|---|---|
| 1950s | 13.2% | 5.4% | 19.3% | 2.2% | 10.7% | 16.7% |
| 1960s | 4.4% | 3.3% | 7.8% | 2.5% | 1.8% | 5.2% |
| 1970s | 1.6% | 4.3% | 5.8% | 7.4% | -5.4% | -1.4% |
| 1980s | 12.6% | 4.6% | 17.3% | 5.1% | 7.1% | 11.6% |
| 1990s | 15.3% | 2.7% | 18.1% | 2.9% | 12.0% | 14.7% |
| 2000-2006 | -0.5% | 1.6% | 1.1% | 2.6% | -3.1% | -1.5% |
| 1950-2006 | 8.0% | 3.7% | 11.9% | 3.8% | 4.0% | 7.8% |
Notes: Figures for dividend distribution rates in the previous table present high uncertainty, of about ±5%. Geometric averages were calculated for price changes, total returns and inflation. Raw data for this work was obtained from the following sources:
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