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
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.
To help you really appreciate that, let's look at a few specific examples.
When you combine price appreciation and dividends, United Parcel Service
Dividends can be especially welcome when a stock stalls out. Even though Wal-Mart
When a stock falls, dividends can cushion the blow. Look at World Wrestling Entertainment
Even a falling dividend can be okay. Some shareholders are bracing themselves for possible dividend cuts from mortgage investors Annaly Capital Management
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."
Longtime Fool contributor Selena Maranjian owns shares of Wal-Mart and Annaly Capital, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Abbott Labs, Chimera Investment, Wal-Mart, Annaly Capital, and UPS. Motley Fool newsletter services have recommended buying shares of Abbott Labs and Wal-Mart, as well as creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.