Tuesday, 9 March 2010

TSX Composite and S&P 500 Total Market Return

Investors always need to be wary that they are comparing apples with apples when measuring returns.

Dividends Left Out!
Every day the news trumpets the latest rise or fall of the major stock indices such as Canada's TSX Composite or the USA's S&P 500 but the number the news media quotes is only the Price level of the stocks in the index. A significant part of the return an investor receives over the long term, especially investors who buy and hold, is the dividends paid out by the companies. When reinvested, those dividends have a powerful long term compounding effect.

Take a look at the steadily diverging lines of the two measures of the TSX in this GlobeInvestor.com chart of TSX Price Index vs Total Return Index. In the relatively short period of the past five years, the TSX return is almost double - close to 40% Total Return vs 20% Price return - when dividends are included. The TSX Composite dividend yield may seem small at around 2% these days but it matters a lot.

The same holds true for the USA. This article at SimpleStockInvesting.com discusses Total Returns for the S&P 500 and shows this chart for the period 1950 - 2009 of the Index Price Return vs the Total Return.

Where to Get Total Return Figures
What is available on many popular investment websites like Google Finance, Yahoo Finance, MSN Money and TMX Money (the TSX's own website) is the Index Price level only. Total Return figures are hard to find for free online but a few sources contain this valuable data.

S&P 500 - the performance data webpage of the index publisher Standard and Poors has YTD, 1,3 and 5 year annualized returns but only in US dollars, which means a Canadian investor cannot tell his/her return in Canadian dollars. Wikipedia also has an article containing year by year and compound returns for 5, 10 and 15 years but again this is only in USD.

TSX and a Few Other Indices - GlobeFund.com has a table of mutual fund benchmarks with several Total Return Indices amongst other indices showing returns from 1 month to 10 years. GlobeFund also lets you chart any ETF or mutual fund against several other Total Return benchmarks such as the S&P 500 or the Dow Jones Industrial Average (DJIA in the list) both in US dollars and Canadian dollars, and the Chinese Hang Seng and Japanese Nikkei in Canadian dollars as well as the home currency. The value of GlobeFund is mainly to see the evolution of the Total Return Index not the fund since the fund returns do not assume reinvested distributions or dividends i.e. it is not an apples to apples comparison.

It is important to remember also that the Total Return results do not include the commission costs of reinvestment, such as normally is required for ETFs, nor do they take account of the effect of taxes, which would affect taxable accounts.

Total Returns are important for two reasons. First, they are a reminder that because dividends contribute greatly to long term performance, it is essential to reinvest them during the years of savings and growth prior to retirement. Second, using the better-known Index Price performance instead of Total Return to benchmark your own portfolio results will lead you to over-estimate your true success. Remember them apples.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.


Igor said...

> Second, using the better-known Index Price performance instead of Total Return to benchmark your own portfolio results will lead you to over-estimate your true success.

I'm not sure that I understand it.
When dividends are included total return has to outperform Price return, i.e. the other way around?

CanadianInvestor said...

Hi Igor, Yes, total return will be better than price return only. I meant to refer to what you compare your own performance to. The way it works is this: let's say the price index (excl dividends) gains 6% but the total return (incl 2% dividends) is 8%. If your overall portfolio increase, which will include both the price gain and the new cash from dividends received in you account, is 7%, you will mistakenly think you outperformed if you compare only to the commonly available TSX, Dow Jones, S&P500 or other price index.

Anonymous said...

Complex Post. This post helped me in my school assignment. Thanks Alot

Will said...

I'm finding it very difficult to find a good way of properly comparing total return of ETF's and indexes. I wasn't even aware that data on google finance and others don't include these when making comparisons.

Could you maybe do a comparison of total return for XIU and a few of the dividend ETF's, and maybe some other assets like REIT's?

When I compare XIU to a dividend ETF on googlefinance the prices aren't that different, but I have no good way of seeing the total return. obviously the higher yield has a positive effect but I have no way of knowing how much.

CanadianInvestor said...

Hi Will,
The websites of the ETF providers give Total Return numbers too e.g. iShares.ca for XIU. The NAV return is of course, net of fees.

johngrisum said...

Is there a source that will easily allow comparing tsx stocks based upon their total average annual return (3year, 5year, 10year) in tabular format?

CanadianInvestor said...

Johngrisum, try Morningstar.ca for individual stocks one at a time e.g. CNR under the performance tab - http://quote.morningstar.ca/Quicktakes/stock/perf.aspx?t=CNR&region=CAN&culture=en-CA&ops=clear