As you probably know, a year ago I purchased some dividend stocks.
The market had just tanked and I felt like it was time to pounce on some investments that I had been watching for some time (but were just too expensive IMO to buy).
Well, the coronavirus took care of the expensive part and knocked the entire market for a loop in March 2020.
Having lived through 2008-2009, I felt fairly confident that things would bounce back, but even for an “old pro” like me, it took a gut check to follow up on those feelings and actually take action.
But take action I did. I plowed as much cash as I could (while keeping my emergency fund in tact) into both index funds and dividend stocks.
Many readers wondered why I even bought dividend stocks and didn’t put it all into index funds.
I’ve addressed that previously, but the main reasons are:
- I wanted investments that produced a higher level of income as I’m trying to create a 100% passive income portfolio that supports our lifestyle (more on this in a future post).
- I wanted to see if I could outperform the S&P 500 with dividend stocks. If you Google around you’ll see articles on both sides of the issue — that dividend stocks can allow you to outperform the market and others that say you should always just stick with an index fund and realize income by selling.
- I was financially able to. I have won the game and can now stop playing by the rules that got me here. So I can take a small portion of my net worth and invest it however I want to. After all, there’s no better teacher than experience, so I wanted to dive in and see what all this dividend investing was about.
If that’s not enough background, you can read How I Added Dividend Stocks to My Portfolio and you’ll be up to speed.
Let’s Begin with a Disclaimer
As I’ve done on other posts where I discuss specific investments, I want to put a few statements upfront just to be 100% clear to all readers:
This post is about what I’ve done investing-wise.
It’s not about what you should do investing-wise.
I do not know your goals, financial situation, or any one of a hundred other details that would even slightly qualify me to offer any investing advice to you.
As such, this post is not meant as stock advice. I am not recommending you do what I do, I’m simply telling what I did.
You need to make your own decisions based on your own goals and situation in life.
I could lose every penny of the money I’ve invested.
Every premise I’ve used to try and make a smart decision could be wrong.
If I do lose it all, I’ll be fine.
You do your own investing at your own risk.
Ok, now that you’ve been warned, let’s get to the post…
Now that it’s been a year, I wanted to look at the stocks I purchased and compare those to the S&P 500. That’s what this post is about.
Calculating S&P 500 Returns
You think it would be easy to find the S&P 500 returns from one date to another. But it is not.
At least it wasn’t for me. Perhaps for some it’s a piece of cake, but not for me.
Part of the reason is that I don’t track return rates that closely. I have always focused more on the amount and time invested, with time being the most important factor. Return rate just had to be “good” (not great) if those other two were excellent (which for me, they were).
This is similar to the situations most millionaires I’ve interviewed fall into as well. I ask them, “What’s been your overall return?” I even tell them “(a rough estimate is fine)”. And yet most of them answer along the lines of “I have no idea.”
But thankfully, I have a place to turn to for solid direction.
Total Return Indexes
After making my own attempt at calculating the S&P 500 returns, I asked the following in the Millionaire Money Mentors forums:
I’m writing a post and need to know the following:
The S&P 500 return (including dividends) from opening on March 26, 2020 to closing on March 25, 2021.
I have an answer, but I don’t trust it.
Tell me what you think and we’ll compare results…
Many of the mentors and members jumped in to offer thoughts but it was Apex (no surprise) who not only offered the best response, but also gave us all an education along the way.
He responded with the following:
This question is actually quite easy for me to answer.
The reason this is usually hard to answer is because everyone follows stock price indexes. They are what is universally reported. They are the only thing most people even know exists. It is very unfortunate that is the case because stock price indexes are very misleading over longer stretches.
Stock price indexes are simply wrong and it is a shame that they are what everyone uses because they exclude dividends. But how important are dividends really? I mean they are like 1-2% of the entire market right, so it’s just noise. In a single year that is mostly true.
Here is a quote I found just by googling dividends as a percent of total return: “Over the past 81 years, then, reinvested dividend income accounted for approximately 95% of the compound long-term return earned by the companies in the S&P 500.” Does that shock you? It even shocked me to be that high. I didn’t do any work to verify it.
Luckily there are secondary indexes called total return indexes. Those are what I use exclusively as I track my option performance and compare to both the SP500 total return index and the Nasdaq total return index (specifically the Nasdaq 100 total return index). My goal is to beat both. If I can’t beat them I might as well join them. So far so good but the point is, I compare to total return not stock price index return because stock price index return is very misleading.
So this number is easy to calculate. You simply take the SP500 Total return index (^SP500TR) and compare the values of that index on 3/26/20 and 3/26/21.
Here is a breakdown of numbers from that index for some comparable dates you might want to use:
If we compare 3/26/20 with 3/26/21 (8240.38 / 5360.49) we get 53.72%.
If you want to compare the absolute low on 3/23/20 to 3/23/21 (8106.83 / 4559.50) we get 77.80%.
If you want to compare the absolute low on 3/23/20 to today 3/26/21 (8240.38 / 4559.50) we get 80.73%
Those are the accurate total returns for those periods including dividends.
Don’t be surprised. He hits it out of the ballpark with most of his responses.
In fact, I KNEW he would respond to my question and I KNEW he’d over-deliver on the answer.
S&P 500 Results
Still, I wanted to be sure I had the exact numbers correct, so I replied back as follows:
I assume these are closing numbers, correct?
So I’d take the closing number from 3/25/20 (which would be the opening number for 3/26/20, the first full day I owned the stocks.
Then I’d take the number for 3/25/21 to get in my 365 days.
(8105.51-5045.35)/5045.35 = 60.65%
He confirmed that these were correct.
I now had the S&P 500 results for the time period covering the first year I owned my dividend stocks. It returned 60.65%.
That’s a pretty good return, right? I think so! My index funds have certainly done well during that time.
Dividend Stock Returns
Now I had to calculate the return on my dividend stocks.
As a reminder, here are the dividend stocks I bought and when:
- I purchased my original 10 dividend stocks on March 25, 2020.
- I added one more on April 6.
- I purchased my last one on July 9.
The original ten stocks are as follows:
- Abbvie (ABBV)
- Aflac (AFL)
- Archer Daniels Midland (ADM)
- Eastman Chemical (EMN)
- Emerson Electric (EMR)
- Exxon (XOM)
- Franklin Resources (BEN)
- Minnesota Mining (MMM)
- Nucor Corp (NUE)
- Sysco (SYY)
On April 6 I added Chevron (CVX) and on July 9 I added Walgreen’s (WBA).
For the purpose of this comparison, I’ll only be using the first ten since those are the ones with a year of history.
Here are my final purchase results:
- Total stocks: 10
- Amount invested: $199,930
- Estimated Annual Dividends: $11,067
- Estimated Annual Dividend Yield: 5.54%
And here are the results:
- As of March 25, 2021, those ten stocks had a value of $368,706.
- In addition, those stocks have paid me $7,852.18 so far over the course of the last year. (FYI, this does not include the fourth quarter of the year’s dividends for some of these. On the initial investment, I should be paid $11,076.12 when all the dividends come in for my first year of ownership. But we’ll use the smaller number here just to make my investment results lower.)
- This makes their total one-year value to me as follows: $376,558
- This equates to a return of 88.3%. The math: (376,558 – 199,930)/199,930.
So, is a return of 88.3% better than a return of 60.65%? I think it is. 🙂
And obviously the reason is not the dividend. That may account for a small part of the difference. The dividend stocks did better because they appreciated more than the market as a whole.
Here’s how each stock performed in the year (not counting dividends):
- Abbvie (ABBV): 54.7%
- Aflac (AFL): 69.5%
- Archer Daniels Midland (ADM): 72.9%
- Eastman Chemical (EMN): 156.34%
- Emerson Electric (EMR): 96.2%
- Exxon (XOM): 50.9%
- Franklin Resources (BEN): 75.7%
- Minnesota Mining (MMM): 48.6%
- Nucor Corp (NUE): 127.59%
- Sysco (SYY): 92.08%
You can add 3.9% to 9.8% to each of these to get total return if you like. (If you really want to do that, you can go to part 2 of my dividend stocks posts and add in the yields noted there.)
All but three of them were above the S&P 500 returns WITHOUT counting dividends. Not bad at all.
What Does This Mean?
So what does this mean? That I missed my calling as a stock picker? That maybe I’ve gotten wiser in buying stocks since I tried and failed miserably in my 30’s?
Hahahaha. I wish.
Yes, I did do a lot of research and narrowed down the stocks I felt really good about. And yes, I did take the risk and actually buy them.
But in the end, I was fortunate. The results could have gone either way.
Let’s go back to Apex who put it in this ever-so-subtle way:
Huge swings can happen around bottoms and if your purchase date is off a couple days it can make a huge difference. You are also talking about 10 stocks. If Tesla was in your list your return would be 3 figures. A 10 stock portfolio should not be surprising at all to diverge significantly from a 500 stock average. It could diverge significantly in either direction.
The whole process illustrates a couple principles I noted in How the Rich Get Richer, especially #2 (They have surplus funds to invest) and #5 (They can strike when the iron is hot.) It also helps that the amount I invested was not going to make or break me, so I could afford to be a little bit more risky with it. And as a result, these particular stocks did really well.
I wanted to share the results because when I made the investments several people wondered what the results would be — and I promised to follow up with a report after a year.
More on Total Return Indexes
There was more to our thread in the forums that I think many of you will find interesting.
Apex went on to educate us even more on total return indexes:
For anyone who is interested here are 5 total return indexes for most of the major indexes people benchmark against. Below is the ticker for the stock price only index with its value on 3/26/21 and then the total return index with its value on 3/26/21.
They will be listed as follows:
Index : Normal ticker (Normal Value) : Total Return Index (Total Return Value)
- Dow Jones : ^DJI (33,072.88) : ^DJITR (76,849.96)
- S&P 500 : ^GSPC (3,974.54) : ^SP500TR (8,240.38)
- Nasdaq : ^IXIC (13,138.72) : ^XCMP (15,594.59)
- Nasdaq 100 : ^NDX (12,979.12) : ^XNDX (15,205.20)
- Russell 2000 : ^RUT (2,221.48) : ^RUTTR (11,408.52)
You can see some of these have a small difference between indexes (Nasdaq), some have a medium difference, (SP500 and DJIA), and some have a very large difference (Russel 2000).
This is mostly because of the age of the indexes. Some of these indexes aren’t that old so they haven’t had the time to build the gap that others have.
As I mentioned above over a previous 81 year period the SP500 total return was 95% from dividends which means the SP500TR would be 20 times larger than the SP500 index if it was 81 years old. However the SP500TR was only introduced in 1993 so it is only 27 years old and it is already over twice the size of the SP500 index and dividends are not nearly as large a percent of returns as they were 80 years ago.
Based on the doubling in 27 years that would mean at that rate the SP500TR would be more than 8 times larger than the SP500 index after 81 years going forward from here for example.
One of the members responded:
I have never heard of a Total Return Index but it definitely makes sense.
To which Apex replied:
Exactly. Hardly anyone has.
That’s why I don’t like the normal stock price indexes we all hear reported, but unfortunately it’s what everyone knows and thus what most everyone tracks against which is not a valid comparison.
By tracking to the stock index you are ignoring about 2% of return a year, and I don’t mean 2% of the total return. I mean 2 actual percentage points of return.
So if on average the SP500 is returning 10% a year then the index is only going to be growing at about 8% CAGR per year. That means the index is missing 20% of the annual return each year, and that difference gets compounded every year which is how the index ends up missing 95% of the total return over an 81 year period.
So if you beat the SP500 index by 1% per year you are actually trailing the total SP500 return by about 1% per year due to dividends that amount to about 2% of the total value of the index per year.
Good stuff, right? I know it was an education for me!