As for those die-hard capitalists who denounce sentimental retrospectives (although there is always money in sentimental retrospectives – just ask the movie industry), here are the hard, cold prices. News reports typically focus on short-term gains, sometimes the big winner for the day, then at month-end, quarter-end and year-end.
The news follows the ‘glory’ of the win, quick money, and playing the long-shot. However, many investors are long-term and not home-run hitter, and they measure their numbers over years and decades. Long-term investing has different characteristics. For that time period dividends count significantly, since they pay every year – in good markets and bad (cash-flow is up there in importance), and when compounded can change the return (and therefore the rick-reward trade-off) significantly.
To illustrate, utilities are generally considered slower, but steadier growth investments, paying dividends as they go; they typically (and there are lots of non-typicals out there) attracts income seekers and those wishing lower risk and lower volatility. Since 1989 utilities have returned 3.03% compounded annually, but with dividends added back in, they have returned 7.85% – lower than the S&P 500’s 7.10% stock return, but closer to the 9.41% with dividends (which is a risk-reward trade-off). Information Technology, a sector known for higher risk, has returned 9.51% in stock, and slightly higher with their lower dividends – 10.49%.
The difference in breakdown is significant, but so is the risk, with each investor deciding their own trade-off. Sector investor is also popular for long-term trends, where investors believe certain groups will need to survive and prosper over time. Health Care, which is up 11.66% with dividends (the best of any sector) and energy, which is up 11.59% are examples.
This article was written by S&P Dow Jones Indices Senior Index Analyst Howard Silverblatt.
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