Wednesday, March 20, 2013

Dividend Reinvestment & Total Returns

Here's what $ 10,000 would now be worth if it had been invested since December 31, 1989 up until last Wednesday in the S&P 500.*

From this article in Barron's:

S&P 500
Price Return (excl. dividends): 6.59%
Now Worth: $ 43,988

Total Return (incl. dividends): 8.90%
Now Worth: $ 72,293

An additional $ 28,000+ from reinvested dividends in a bit over two decades. Here's what $ 10,000 looks over the same time frame for the industry groups that performed better than the S&P:

Energy
Price Return: 8.27%
Now Worth: $ 63,201

Total Return: 11.27%
Now Worth: $ 119,081

So nearly half the total return came from dividends reinvested.

Health Care
Price Return: 8.85%
Now Worth: $ 71,560

Total Return: 10.96%
Now Worth: $ 111,675

Consumer Staples
Price Return: 8.32%
Now Worth: $ 63,881

Total Return: 10.92%
Now Worth: $ 110,658

Info Tech
Price Return: 9.05%
Now Worth: $ 74,211

Total Return: 9.95%
Now Worth: $ 90,410

Consumer Disc
Price Return: 7.93%
Now Worth: $ 58,709

Total Return: 9.55%
Now Worth: $ 82,972

Industrials
Price Return: 7.02%
Now Worth: $ 48,262

Total Return: 9.30%
Now Worth: $ 78,796

The industry groups that underperformed the S&P were:

Financials
Price Return: 5.20%
Now Worth: $ 32,390

Total Return: 7.81%
Now worth: $ 57,298

Materials
Price Return: 5.14%
Now Worth: $ 32,003

Total Return: 7.68%
Now worth: $ 55,623

Utilities
Price Return: 2.69%
Now Worth: $ 18,529

Total Return: 7.55%
Now Worth: $ 54,118

Telecom Services
Price Return: 1.95%
Now Worth: $ 15,652

Total Return: 5.78%
Now Worth: $ 36,847

So certain industry groups have done well over the past 20 plus years. Good to know, I guess, but it of course guarantees absolutely nothing about the future.

That utilities, and some might even say telecom services (though not in my book), did much worse than the S&P 500 probably isn't a surprise to some; after all, they're considered to have more "defensive" characteristics. Well, it's at least worth noting (and I've certainly done so before) that consumer staples -- frequently also referred to as defensive --over this longer time horizon performed quite a bit better than the S&P 500. It's only worth pointing because of the defensive label. Otherwise, it would just be another industry group that happened to do well over that time frame. Consumer staples, of course, may not do nearly as well going forward (especially in a very bullish environment...which, in part, explains the label) but it's worth at least recognizing the fact that an industry group often viewed as defensive held its own on "offense" over that longer horizon.

It's through several booms and busts that the merits of the higher quality businesses become more plain. There just happens to be some very high quality business franchises among the consumer staples.

Durable businesses with attractive core economics.

Not all, of course, but those with the most attractive and durable business economics aren't just useful to own for defensive purposes.

A bunch of different stocks -- those with very different risks, opportunities, and economic characteristics -- get labeled as defensive. I think it is clear that not all are anywhere near being equals. More than a few of the best offer both defensive and long-term offensive characteristics; quite solid long-term risk-adjusted prospects, even if a less exciting ride, especially when bought well.**

No matter how high quality an investment is, those long-term investors (i.e. not traders of near-term price action) paying an expensive price relative to current value will likely, best case, have to wait for that value to "catch up" to the too high price. Naturally, that premium price might instead converge on value. Paying a premium to value also doesn't protect the investor from the unforeseen.

Inevitably, things go a bit wrong. Even the best businesses get into difficulties, sometimes severe, from time to time.

Adam

* All returns according S&P Dow Jones Indices.
** For those inclined and comfortable investing in individual stocks. There certainly are some lower quality consumer staples businesses out there. Also, even a good business that has durable advantages needs a management that is capable and inclined to focus on sustaining, and even increasing, the "economic moat". As is competent capital allocation more generally.
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