What the FTSE’s Birthday Says About Dividends

The UK’s famous FTSE 100 Index turned 40 this week,^[i] and we have never seen such a deflated birthday celebration. Instead of gleeful lookbacks at the dawn of Margaret Thatcher’s “Big Bang” financial deregulations and retrospectives on 40 years of innovation and market history, the world seems to us to have heaved a great big sigh. Sigh, businesses don’t list in London anymore. Sigh, these are all old companies in stodgy sectors. Sigh, where is the Tech. And sigh, that index has hardly gone anywhere compared to the S&P 500 and other major indexes.^[ii] In our view, there is a key lesson in this last point, one for investors globally.

Yes, as most financial commentators we follow have pointed out, the FTSE 100’s returns are a bit lacklustre.^[iii] But that is because the FTSE’s headline returns are price only—they don’t include reinvested dividends. We think this is a problem with many indexes, but it has an outsized impact on FTSE 100 returns because it is an index of relatively high dividend payers by global standards.^[iv] And when a company pays a dividend, the per-share payout amount is deducted from the stock price. Therefore, dividends that boost returns in real-life—especially if people reinvest them—subtract from price-only stock returns.

With reinvested dividends, FTSE 100 returns look much better. Citing data from Refinitiv, The Guardian’s Nils Pratley notes the FTSE rose from 1,000 to 7,733 points in its 40-year history, implying an annualised price return of just 5.3%.^[v] Not great, based on our research. But with reinvested dividends, we think things look much better, with the article citing a 40-year annualised return of over 8%.^[vi]

This isn’t the first time omitting dividends has risked creating some false perceptions. Another big example is the US-orientated S&P 500 after the Great Depression. In price-only terms, it took the index about 25 years to reclaim its 1929 high.^[vii] That is a long, long time for investors to be in the red, in our view. But with reinvested dividends, the index got back to breakeven almost 10 years faster and enjoyed massive compound growth whilst the price index was still clawing its way back.^[viii] By 1954’s end, the price return from the end of September 1929 was a paltry 19.3%.^[ix] But the total return was 371.0%.^[x]

Exhibit 1: The Magical Power of Reinvested Dividends

Source: Global Financial Data, Inc., as of 3/1/2024. S&P 500 price and total returns, monthly, 31/12/1928 – 31/12/1953. Presented in US dollars. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.

This is an extreme example, in our view, both because of the depth and length of the downturn and our general observation that cash payouts were bigger in the old days, before corporate share repurchases gained prominence as an alternative way to return cash to shareholders. But the divide between price and total returns is still relevant, in our view.

After the 2007 – 2009 bear market, the S&P 500 didn’t reclaim its 9 October 2007 high in price terms until 28 March 2013.^[xi] But in total return, it passed breakeven almost a year earlier, on 2 April 2012.^[xii] This time around, commentators we follow remain on tenterhooks for the S&P 500 to recapture its prior record high, set 3 January 2022, in price terms, fully erasing that year’s bear market.^[xiii] But in total return, it is already in the black, having hit a new record on 13 December. The MSCI World Index also set a new high last month in US dollars, once dividends are factored in.

Price returns get the most headlines, in our experience, but we think they are only part of the story. No, a dividend isn’t a return on your capital—it is a return of your capital—so we think the principle behind deducting dividends from price returns makes sense. But if you reinvest those dividends, as we find many investors do, they add to returns, and compounding means they can add up bigtime in the long run. Said another way, we find total returns are what match most investors’ actual experience, making them the most meaningful thing to weigh, in our view. We think this is especially relevant when trying to compare returns in high-dividend places—like the UK—with countries with lower payouts. Focussing on price returns could lead to inaccurate conclusions—like the UK is some land of ultra-low stock returns—and unhelpful investment decisions, in our view. We think looking at total return—the total picture—can help investors seeking long-term growth make wiser choices.