Your financial advisor might be leading you astray in a very sneaky way. By comparing their performance to the market's, but excluding dividends from the market's return, unscrupulous money managers have found an easy way to make their own returns look better.
As quoted in an article by Jason Zweig, one financial planner noted that at least 20 times a year, he sees clients with statements from financial advisors that compare their client's performance to a dividend-less index. Small operators aren't alone in apparently fudging their numbers -- Zweig found similarly misleading comparions in newsletters from TheStreet.com and News Corp.'s (Nasdaq: NWS) MarketWatch division.
How big a difference does excluding dividends make? Over the past 10 years, dividends have added more than two percentage points to the average annual return of the S&P 500. Indeed, from 1926 through 2006, 41% of the S&P 500's total return owed not to the price appreciation of its component stocks, but to those companies' dividends.
Powerful payouts
To help you really appreciate that, let's look at a few specific examples.
When you combine price appreciation and dividends, United Parcel Service (NYSE: UPS) gained 59% over the past decade. Without dividends, that gain drops to 28%. Those dividends have also grown at more than a 10% annual clip over the last 10 years, as the company slowly expands its business around the globe.
Abbott Labs' (NYSE: ABT) stock price is roughly flat from where it was a decade ago, but if you factor in dividends, shareholders have come out 38% ahead. The company has been a dividend standout for many decades. Strong sales growth have helped Abbott grow its payouts at more than 9% a year, on average, over the past five years.
Dividends can be especially welcome when a stock stalls out. Even though Wal-Mart (NYSE: WMT) has many shareholders excited about its international growth prospects, and others wondering whether it should spin off its Sam's Clubs division, its stock price has actually fallen in the past 10 years. But long-term shareholders have still collected almost $7.50 per share over those 10 years. That's not a huge amount, but it's enough to turn a loss into a positive total return for the decade.
When a stock falls, dividends can cushion the blow. Look at World Wrestling Entertainment (NYSE: WWE), which has been struggling with declining attendance domestically, though its international operations show promise. It reduced its dividend recently, and its stock, near $10 per share, trades well below its price of around $16 five years ago. But in those five years, investors have collected more than $6 per share in dividends, which has made quite a difference.
Even a falling dividend can be okay. Some shareholders are bracing themselves for possible dividend cuts from mortgage investors Annaly Capital Management (NYSE: NLY) and Chimera Investment (NYSE: CIM). When interest rates rise, their profits will likely take a hit But with each recently yielding more than 14%, even a 50% cut in their yield will still leave them rather attractive.
The bottom line
When benchmarking their own returns, money managers shouldn't ignore the huge difference dividends can make. To ensure strong portfolio performance, seek strong dividends -- and look carefully at any money manager's performance claims.
To get more ideas of great dividend-paying stocks, read about "13 High-Yielding Stocks to Buy Today."
