Most Historical Charts Are Misleading, Especially For Utilities

Includes: AEP, DUK, EXC, SO
by: George Fisher

Most investors look at historical charts when making investment decisions or to justify an investment strategy. However, historical charts do not convey correct information about holding a specific security over time. Historical charts do a great job of easily displaying the gain or loss of the original investment capital. But for many investors and investment sectors, capital appreciation is only about half the historic return generated from invested capital. The other half comes from dividends.

Brad Kinkelaar is a PIMCO Executive Vice President and manager of PIMCO Dividend and Income Builder Fund (MUTF:PQIZX). In an interview outlining the fund's strategy, Mr. Kinkelaar discusses the impact of dividends on overall investment returns:

How have dividend-paying stocks performed historically?

Kinkelaar: Dividend income has been a key component of overall equity returns over most time horizons, averaging 54% of total return from January 1930 to December 2010, according to S&P and International Strategy & Investment (ISI). But what many people may not know is that dividend-paying stocks have historically outperformed the equity market as a whole over time. (Our analysis of historical equity market index returns is based on the S&P 90 from 1928 to 1957, and the S&P 500 from 1957 to 2010, utilizing data and methodology from Kenneth R. French and Robert Shiller.) This fact may seem counterintuitive to some, but studies have shown that companies that pay higher percentages of their earnings in dividends to shareholders have tended to grow their earnings faster than companies that have kept more of the cash. (For example, Robert D. Arnott and Clifford S. Asness, "Surprise! Higher Dividends=Higher Earnings Growth" covering companies in the S&P 500 from 1946 to 2001.) That is because capital allocation matters. Businesses that have committed to the discipline of dividend payments are typically forced to manage their cash more judiciously, including the cash they invest in expansion opportunities. As a result, we believe they tend to be better businesses and have better return potential than companies without that discipline."

From the chart below, which index would you prefer to own - the one that represents a 10-year appreciation of 100% or the one that represents a 10-year appreciation of 200%?

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It seems like a simpleton question with a simpleton answer - of course the one with 200% appreciation. However, they are the same index - Dow Jones Utility Index - but the black line is price only and the gold line is total return including dividends.

I believe one needs to look at TSR - total stock returns - when discussing long-term investment returns and investment strategies. However most charting sites do not offer total return data and utilize price points only. used to have a tool called "What if I had invested…" that calculated TSR including reinvestment of dividends, but, alas, that tool is no longer offered. The best offering seems to be from and TickerTech charting goes back to 1997 while Morningstar goes back 10 years (beginning 2007 for the "collapsed view" and beginning 2002 for "expanded view"). Their charts on Exelon (NYSE:EXC) can be found here (TickerTech - click on the bottom "calculate return" for performance chart ) and here (Morningstar). Morningstar allows for total return comparison of up to 5 stocks.

EXC Total Return since 2002, per

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EXC Total Return since 1995, per

EXC Return Price Only since 1995, per

Using Morningstar total return performance for 4 of the largest names in the electric utility sector - EXC, Duke (NYSE:DUK), American Electric Power (NYSE:AEP), and Southern Company (NYSE:SO) - would produce the following chart:

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Compare the above chart with a price only chart of the same companies from

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Another means of calculating total return can be found on using the Historical Price tool. On any specific day in the past 10 years, the tool will list both the historic price and a dividend-adjusted price where dividends received since that date are deducted from the historic price. For example, on October 21, 2002, EXC stock closed at $48.85. With the current EXC price of $35.64, a price only chart would show a loss of $13.21 per share, or a total loss of 27%. However, the adjusted price including dividends received would be $16.88, for a total gain of $18.76 per share or 38%.

Most investors would believe the adage that over the past decade technology stocks have outperformed utility stocks as tech stocks are usually bought for their capital gains potential. However, over the past 10 years on a total stock return basis the opposite is true with utilities offering a 200% total return to tech's 150% total return. See the chart below comparing DJ Technology Index Total Return (DJUSTCT) vs DJ Utility Index Total Return (DJUSUTT):

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When evaluating various stock investments, do not rely just on price charts as they may be only telling half the story.

For investors looking for total return performance by sector, total return symbols for Dow Jones US Total Market Index are:
DJUSUTT - Utility
DJUSTLT - Telecom
DJUSTCT - Technology
DJUSENT - Oil & Gas
DJUSINT - Industrials
DJUSHCT - Health Care
DJUSFNT - Financials
DJUSCYT - Consumer Services
DJUSNCT - Consumer Goods
DJUSBMT - Basic Goods

Dividends can, and should be, incorporated into return analysis. Especially when evaluating past performance of utility companies and other stocks with large dividend returns.

See important disclaimer in Mr. Parepoynt's profile

Disclosure: I am long AEP, EXC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.