When financial advisors claim to have “beaten the S&P 500 over the past decade,” it’s easy to assume they have consistently outperformed the stock market. However, this statement can be misleading. Many people don’t realize that the S&P 500 index, as reported in the news, only reflects price appreciation—how much the stock prices have risen or fallen. What it doesn’t account for is the dividends those stocks pay, which can significantly impact overall returns.
Understanding the S&P 500
The S&P 500 is a stock market index that tracks the performance of 500 of the largest publicly traded companies in the U.S. Investors and financial professionals often use it as a benchmark for overall market performance. When news outlets report that “the S&P 500 is up 10% this year,” they are referring only to the price changes of the stocks within the index, not the total return investors receive.
The Role of Dividends
Dividends are payments that companies distribute to shareholders, usually as a portion of their profits. Not all companies pay dividends, but many large, stable corporations do. For example, if an investor owns 100 shares of a company that pays an annual dividend of $2 per share, they receive $200 per year simply for holding the stock.
Why Dividends Matter for Total Returns
The S&P 500 Total Return Index (SPTR) includes both price appreciation and dividends reinvested over time. Historically, dividends have played a crucial role in long-term market returns. According to historical data, from 1990 to 2020, the S&P 500 price index grew at an average annual rate of around 7.5%. However, when dividends were reinvested, the total return was closer to 10.5% per year. Over a decade or more, this difference compounds significantly.
The Power of Dividend Reinvestment
Reinvesting dividends means using them to purchase additional shares of stock rather than taking them as cash. This strategy can accelerate wealth accumulation because new shares generate their own dividends, leading to exponential growth. For example, an investor who put $10,000 into the S&P 500 in 1993 and reinvested all dividends would have seen their investment grow to more than $150,000 by 2023, compared to approximately $90,000 if they only relied on price appreciation.
The Truth Behind “Beating the Market”
When an advisor claims to have outperformed the S&P 500, it’s essential to ask whether they are comparing their results to the price index or the total return index. If they’re only measuring against price appreciation, their claim may not be as impressive as it seems. To truly assess performance, investors should compare returns to the S&P 500 Total Return Index, which accounts for both stock growth and dividends reinvested.
Final Thoughts
Understanding the difference between the S&P 500’s price index and its total return index can help investors make more informed decisions. Dividends are a critical component of market returns, and their reinvestment can significantly enhance long-term wealth-building strategies. Before trusting an advisor’s claim of “beating the market,” it’s worth digging deeper to see what they’re really measuring.
