returns: capital changes vs. total return

Happy New Year!!

Like a stock that’s gone ex-dividend, my mind has gone ex-thoughts on the final day of the year.  My family might contend that this is not as unusual as I want to make it out to be.  Whatever the case, I can always hope that, like dividends, my absent thoughts will show up in my account as credits in a day or two.

Anyway, this is the best I can come up with on a sleepy New Year’s Eve.

Through last Friday, the S&P 500 was up 14.07% for 2012, year to date, on a total return basis.  The index was up 12.52% on a capital changes basis.

The difference?

Total return includes dividend payments as part of the return.  Capital changes doesn’t.

In figuring out your performance against the index, the total return figure is the one to use.  Looking at standard reference sources, like your broker’s website or the financial news, however, the figure that gets the most prominence is the capital changes one.

There are two historical reasons for this:

–from the mid-1980s until very recently, US Baby Boomers, who have been a major force in the domestic stock market, have been pretty much exclusively interested in capital gains, not in dividend income. So they paid the highest prices for growth companies.   Firms risked being typecast as dowdy and unimaginative if they paid large dividends, so they didn’t.  The result is that the dividend yield on the S&P has been small, and easily ignored.  No longer, though.

–keeping track on a daily basis of inflows and outflows of funds, account by account, is necessary for an accurate total return performance calculation.  This was beyond the computer capabilities of the custodian banks I knew for a considerable portion of my professional career.  Easier to ignore than to spend the time and money to upgrade staff and computer systems–especially when the calculation didn’t make that much difference.

2012 (and beyond): a different story

Dividends are again a significant component of the total return on US stocks.

2012 has seen a significant number of companies declare large special dividends, making the difference between their stocks’ capital changes and total returns especially large.  Take WYNN, which I own, as an example:

Through last Friday, WYNN is just about unchanged, year to date, meaning a capital changes return of 0.  The company has paid out dividends of $10, an $8 special dividend + four quarterly $.50 dividends.  On a total return basis, then, the stock is up a bit over 9%.  Yes, still an underperformer–but not by the margin that just looking at the figures Yahoo or Google offer would suggest.

I’m not sure that 2013 will be a year to write home about as far as capital change in the S&P 500 is concerned (more about this when I post my strategy for 2013).  Despite the absence of a spate of special payouts, I think dividends will be at least as important to next year’s total returns as they have been in 2012.

See you next year!

 

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