When academic researchers evaluate the performance of equity investments, they automatically combine changes in the price of an asset with dividends to look at total returns. “These two sources of profit are considered so obviously equivalent that their combination into a single returns variable is typically done by finance academics almost without thought,” write Chicago Booth’s Samuel Hartzmark and Boston College’s David H. Solomon.
Yet investors often miss the dividend component of returns, because the most popular sources of market information don’t display total returns, the researchers find. Brokerage statements, newspapers, and financial websites typically display price changes in nominal or percentage terms, but almost never aggregate and display total returns.
Few investors are thinking or trading in terms of total returns, at least in part because they never actually see them, the researchers conclude. The sources of the most widely reported measures of stock market performance—the Dow Jones Industrial Average and the S&P 500—compute their market index using only price changes of stocks without adjusting for dividend payments. This leads stocks to rise and fall with market price changes—rather than to move with total market return, as economic theory would suggest they should do.
Most investors also neglect total returns when evaluating mutual funds. Instead of comparing a mutual fund’s return to the market’s total return, investors look at percentage changes in a fund’s net asset value, which doesn’t correct for dividends or other distributions such as capital gains. Further, Hartzmark and Solomon find that investors reward funds with net-asset-value changes that beat the S&P 500’s movements—even though the comparison isn’t a good one. Both measures exclude different and important aspects of value: net asset value omits dividends and realized capital gains, while the S&P 500 benchmark calculation omits dividend yield. Yet investors compare these two numbers when evaluating a mutual fund’s performance.
To examine information display, Hartzmark and Solomon dug through thousands of Wall Street Journal issues, examining how the performance of stocks on the New York Stock Exchange was presented from 1890 through 2016.
“Prior to 1928, prices were reported, but there was no information about dividends,” write Hartzmark and Solomon. “After 1928 dividend information began to be reported, but separately from price information.” The Wall Street Journal, along with other outlets such as Yahoo! Finance, rarely report a combined textbook-performance-return measure for individual stocks, the research finds. Consequently, investors’ perception of a return is distorted.