What the FTSE’s Birthday Says About Dividends

The UK’s famous FTSE 100 Index turned 40 this week,^[i] and have you ever seen such a deflated birthday celebration? Instead of gleeful lookbacks at the dawn of the UK’s “Big Bang” financial deregulations and retrospectives on 40 years of innovation and market history, the world seems 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. There is a key lesson in this last point, one for investors globally.

Yes, as most of the world’s financial commentators have pointed out, the FTSE 100’s returns are a bit sad. But that is because the FTSE’s headline returns are price only—they don’t include reinvested dividends. This is a problem with many indexes, but it has an outsized impact on FTSE 100 returns because it is an index of high dividend payers. 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 folks reinvest them—subtract from stock price-only returns.

With reinvested dividends, FTSE 100 returns look much better. Citing data from AJ Bell, Bloomberg’s Merryn Somerset Webb notes the FTSE’s 40-year annualized price return is just 5.2%, versus 9.1% for US stocks and 7.8% for Europe, beating only Japan’s 4.6%.^[ii] But with reinvested dividends, things look much better, with the FTSE 100’s 8.6% in line with Europe’s 8.7% and closer to the S&P 500’s 11.4%.^[iii] These are all in pounds to compare like with like, but it is similar on a local currency basis.

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

Exhibit 1: The Magical Power of Reinvested Dividends

Source: Global Financial Data, Inc., as of 1/3/2024. S&P 500 price and total returns, monthly, 12/31/1928 – 12/31/1954.

This is an extreme example, both because of the depth and length of the downturn and the fact that cash payouts were bigger in the old days, before stock buybacks gained prominence as a tax-friendlier way to return cash to shareholders. But the divide between price and total returns is still a thing.

After the 2007 – 2009 bear market, the S&P 500 didn’t reclaim its October 9, 2007 high in price terms until March 28, 2013.^[vi] But in total return, it passed breakeven almost a year earlier, on April 2, 2012.^[vii] This time around, the world remains on tenterhooks for the S&P 500 to recapture its prior record high, set January 3, 2022, in price terms, fully erasing that year’s bear market. But in total return, it is already in the black, having hit a new record on December 13. 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, but 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 the principle behind deducting dividends from price returns makes sense. But if you reinvest those dividends, as many investors do, they add to returns, and compounding means they add up bigtime in the long run. Said another way, total returns are what match most investors’ actual experience, making them the most meaningful thing to weigh, in our view. This is especially true when trying to compare returns in high-dividend places—like the UK—with countries with lower payouts. Focusing on price returns could lead to inaccurate conclusions—like the UK is some land of ultra-low stock returns—and unhelpful investment decisions. Looking at total return—the total picture—can help you make wiser choices.