Dow at new high and dividend distributions
I think by now many people are probably already aware that the Dow Jones Industrials Average (DJIA) Index closed on a new all-time high of 11,727.34 on Oct 3, 2006. The previous highest close was 11,722.98, reached on Jan 14, 2000.
While the new high is only some 0.0372% higher than the number set six and a half years ago, it is incorrect to conclude that had an investor invested $100,000 in the DJIA companies back in Jan 14, 2000, he would now be back to square one, i.e. roughly breakeven on the investment ($100,037.20). This is because the index itself does not adjust for the effect of dividends.
To see this, let’s use the example of the DIAMONDS ETF (DIA), which specifically invests in the Dow companies. Using data from Yahoo finance, on Jan 14, 2000, DIA closed at 117.50 and on Oct 3, 2006 it closed at 117.14. (In fact, if we just looked at the raw numbers, DIA actually closed lower on Oct 3, 2006 than on Jan 14, 2000! This is probably due to the effect of expenses incurred by the fund; but this is not the main point of this post.) But if we take dividend distributions into account, the picture is different.
To take dividend distributions into account, we have to dig up the dividends distributed by DIA through the six and a half years. However, there is an easier way; you can view this information from Yahoo finance since it conveniently adjusts for the effect of dividends. This is shown in the last column of the attached figure.
To get the full picture, we note that the adjusted close of DIA on Jan 14, 2000 was $103.52. It closed at $117.14 on Oct 3, 2006. So the gain is 13.16% for the six and a half years. In other words, if you had put $100,000 in the DJIA companies in a tax-advantaged account on Jan 14, 2000, you would now have roughly $113,160. Not a big gain, but far better than the $100,037.20 had we not properly accounted for the dividends.
Note that this “quirk of index construction” is sometimes used by indexing-bashers to confuse investors that investing in index funds gets you nowhere after ‘X’ number of years. But the fact is, the raw index numbers usually does not include dividend distributions, and does not tell the true story.
Update:
DIA’s adjusted close on Jan 14, 2000 was $103.52. The next high for DIA’s adjusted close was on Dec 21, 2004 at $103.55. So the DIA ETF first broke the breakeven point on Dec 21, 2004.
Stumble it!
October 4th, 2006 at 3:47 pm
[...] to dividend distributions. That’s a great point. See his post for more details. Was this article interesting? Add it to del.icio.us Posted by Joe « Jim Cramer defeated by imaginarymonkey [...]
October 8th, 2006 at 9:11 pm
[...] The recent highs of the Dow Jones Industrials Average prompted me to look into whether a lump-sum investment at the peak of the S&P 500 has reached the breakeven point. According to data from Yahoo finance, the S&P 500 reached its last peak on Mar 24, 2000, with a value of 1527.46 and the closing value of the S&P 500 on Oct 6, 2006 was 1349.59. This means that the ‘raw’ index has only reached 1349.59 / 1527.46 = 88.4% of its 2000 peak. It appears that there is more than 10% to go before the breakeven point is reached. [...]