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Most Historical Charts Are Misleading, Especially For Utilities

Oct. 26, 2012 8:48 AM ETAEP, DUK, EXC, SO10 Comments
George Fisher profile picture
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 (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

This article was written by

George Fisher profile picture
I am the author of Guiding Mast Investments monthly newsletter, focused on timely dividend paying stocks. Our mission at Guiding Mast Investments is to help investors keep a steady pace of wealth accumulation as they navigate through their financial voyage.  I have been a Registered Investment Advisor, financial author, and entrepreneur. I bring a variety of expertise to my clients, from personal investment planning and management to stock market analysis skills. I am the creator of the late 1990s investment newsletter Power Investing with DRIPs focused on timely selections of dividend paying stocks. I have also published two books through McGraw Hill, All About DRIPs and DSPs (2001), and The StreetSmart Guide to Overlooked Stocks (2002). My work experience covers a variety of fields.Prior to being a RIA, I spent 15 years as a corporate manager at Georgia-Pacific Corp before venturing out on my own, operating several businesses from manufacturing to export marketing management. President Ronald Reagan appointed me to the National Advisory Council overseeing the Small Business Administration from 1988 to 1991. Now comes the obligatory disclaimers: The opinions and any recommendations expressed in this commentary are those of the author . None of the information or opinions expressed in this article constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this commentary constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. The information contained in this report does not purport to be a complete description of the securities market, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Expressions of opinion are as of this date and subject to change without notice. Either Mr. Fisher or his employer, if any, may hold or control long or short positions in the securities or instruments mentioned.

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Comments (10)

George Fisher profile picture
Oak and Reggie,

Thanks for your comments. Way back before my hair turned grey, I used the "What if" tool from Sharebuilder. It could plot several different stocks on the same graph and would give a total value for each investment.
Oak_Tree profile picture
Super article...wonder why this item has been under the radar so long...Smartmoney has good performance charts that show total return [but only for mutual funds]...recently the ReturnFinder App addresses this issue head on and produces both Price and Performance charts on the fly, as well as a rolled up portfolio plot...
WSJ had a couple of articles on this last year ...by Jason Zweig and Simon Constable.
Great article. Thanks.
George Fisher profile picture
Thanks for all your comments. I agree that for technical traders or those looking for long-term technical buy signals that total return calculations and charts are not very useful. However, far too often strategies that use charts to justify a specific theory don't consider the impact of total returns vs price-only returns.

I read a recent article on SA that used price-only charts to justify that very few have made a profit in the market when adjusted for inflation. I wondered aloud what the charts would look like if total return was used rather than price-only. Guess what - it was ignored by the author.

Again, thanks for all your comments
misscbd profile picture
thank you jdh44 and momintn -- both sites are very helpful...
Be Here Now profile picture
I found a total return calculator that is oriented toward dividend stocks: http://longrundata.com
Thank you very much as this is very helpful for all stocks. I have been using a total return calculator I found on the internet.
If you look at IBM over the past decade, the annualized total return is 11%. You can also see that most of the squares are green such that many trades are profitable. Total gain beginning 10/28/2002 is 190%. Total gain beginning 2003 is 175%.
Of course past returns do not forecast future returns, but I'm thinking that IBM may outperform utilities in the future if the world can get out of recession and stop having crashes in the stock market with financial regulation.
Be Here Now profile picture
There is another area where some historical charts are misleading. Some charting services show the dividend-adjusted price, whereas others show the true historical price. If you are using charts to identify support and resistance prices, for example, then you want the true historical price. Examples of services with dividend adjusted prices are Finviz and StockCharts (in their free service). Examples of services with true historic prices are bigcharts and yahoo. However, at least one of those with true historic prices does not account for stock splits correctly. KMR pays its dividend as a stock split, and yahoo finance does not adjust its historical prices correctly but bigcharts does.

The moral is that you have to be really careful where you get your information.
Great article. Kinkelaar's approach makes a lot of sense. I am going to take a look at his fund.
I do agree that many people think the common charts represent investor's returns. But I would think most of the time, when charts are produced, that they are not for the purposes of looking at past returns, that they are being used to evaluate the value of the company as it relates to the stock$, earnings$,dividend$ and P/E. In that situation it is the price charts that are relevant. All depends what you want.
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