NCPA - National Center for Policy Analysis

Total Investment Return: Capital Gains and Dividends

March 8, 2002

The stock market outperforms most other investments over the long-term. But in the past few years, many investors have come to identify a stock's performance with its appreciation in value, or capital gains. However, a report by Gail Dudack, managing director of research at SunGard Institutional Brokerage, makes the point that much of the performance of stocks over time has come from dividends -- the shares of a company's profits distributed to stockholders.

Taking the two-century history of total return from stocks, Dudack separated the return from capital gains and the return from dividends reinvested in additional stock.

  • "In 13 of the 20 decades cited, reinvested dividend returns exceeded the returns from capital gains."
  • "Over the last 200 years, dividends represented an average 57 percent of the total return seen over the course of each decade."

Stocks that rise slowly in value, but also yield regular dividends, are indicative of companies "with real cash flow and real earnings," says Dudack, whereas a short-term run up in a company's stock price -- particularly a company with no track record of profitability or dividend payments -- reflects only the market's expectation about the future.

One implication for long-term retirement savings is that investors can get a relatively better total return from investment in such "high-yield" stocks -- even when the market is flat or rising slowly.

Source: Shirley Lazo, "Many Happy Returns," Barron's, March 4, 2002; Gail Dudack, "Themes for 2002 and Beyond: Total Return -- The 'New New' Thing, " February 2002, SunGard Institutional Brokerage.


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