Most Historical Charts Are Misleading, Especially For Utilities

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 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%?

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. Sharebuilder.com 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 TickerTech.com and Morningstar.com. 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 (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 Morningstar.com

EXC Total Return since 1995, per TickerTech.com

EXC Return Price Only since 1995, per TickerTech.com

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

Compare the above chart with a price only chart of the same companies from BigCharts.com:

Another means of calculating total return can be found on finance.yahoo 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):

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.

Comments

[George Fisher]

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]

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.

[reggiejameson]

Great article. Thanks.

[George Fisher]

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]

thank you jdh44 and momintn -- both sites are very helpful...
LOVE SA....

[Be Here Now]

I found a total return calculator that is oriented toward dividend stocks: http://longrundata.com

[Momintn]

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.
http://bit.ly/MIOmnS
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]

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.

[John A. Mills]

Great article. Kinkelaar's approach makes a lot of sense. I am going to take a look at his fund.

[retailinvestor]

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.