There's a number that almost everyone ignores when they think about stock market returns. It's not particularly complicated. It's not new. It's been hiding in plain sight for the entire history of public equities.

Dividends.

Specifically: whether the return number you're looking at includes dividends or excludes them. The difference between "price return" (excludes dividends) and "total return" (includes dividends) is roughly 1.5 to 2 percentage points per year for the S&P 500. That sounds small. Compounded over decades, it's enormous.

Anyone evaluating their portfolio's performance, or comparing it to a benchmark, needs to understand which version they're looking at. Most people are looking at the wrong one.

What price return actually measures

Price return is the percentage change in a stock's (or index's) price over a period. If a stock goes from $100 to $110 in a year, the price return is 10%.

This is the version of returns that most financial news displays. The "S&P 500" you see on CNBC, the daily ticker on financial apps, the year-to-date number in most charts: all of those are typically price-only.

Price return ignores dividends entirely. If that $100 stock paid out $3 in dividends over the year while the price went from $100 to $110, the price return is still 10%. The dividends, which were real cash payments to shareholders, don't appear in the number.

For non-dividend-paying stocks, price return and total return are the same. For dividend-paying stocks (the majority of S&P 500 names), they're different. The gap is the dividend yield.

What total return measures

Total return adds dividends back into the calculation, assuming they're reinvested.

The same $100 stock that goes to $110 and pays $3 in dividends has a total return of about 13% (the $10 of price appreciation plus the $3 of dividends, both expressed as a percentage of the $100 starting value, with the assumption that the $3 was used to buy more shares).

For long-term investors, total return is the only number that matters. You're either spending the dividends or reinvesting them. Either way, they're real money. A measurement that excludes them is missing real value.

For the S&P 500 specifically, total return is roughly 1.5% to 2% per year higher than price return. The exact gap varies by year (depending on the dividend yields of the index's constituents), but the long-term average is solid in that range.

The compounding difference

A 1.5% to 2% annual difference sounds small. Compounded over time, it's anything but.

Consider a $10,000 investment held for 25 years.

  • At 8% per year (rough S&P 500 price return): $10,000 grows to about $68,000.
  • At 10% per year (rough S&P 500 total return): $10,000 grows to about $108,000.

Same starting amount, same 25 years. Same underlying index. The gap is $40,000 of extra value, just from including dividends in the math.

Extend the horizon to 40 years (the typical career-savings horizon for retirement) and the gap widens further. The S&P 500's price index gives you maybe 22x growth over 40 years. The total return version gives you closer to 45x. Two times the dollars, just from the dividend reinvestment compounding.

This is why honest performance comparisons must use total return. Comparing your portfolio's total return (which automatically includes dividends because you owned the stocks) to the price-only S&P 500 inflates your apparent outperformance by 1.5% to 2% per year. Over a few decades that's a massive distortion.

The most common dishonest comparison

This is where things get real. Many marketed model portfolios, mutual funds, and advisor presentations compare their performance to "the S&P 500" without specifying which version they used.

Almost without exception, when someone says "the S&P 500 returned X% over this period," they mean price-only. That's the convention in casual conversation and most news.

But the portfolio they're showing you returns are total return numbers. The portfolio collected dividends. Those dividends got reinvested or paid out. Either way, they're in the performance figure.

So the comparison goes like this:

  • Portfolio: 12% per year (total return, includes dividends)
  • "S&P 500": 8% per year (price return, excludes dividends)
  • "Outperformance": 4% per year

The actual fair comparison is:

  • Portfolio: 12% per year
  • S&P 500 Total Return: 10% per year
  • Outperformance: 2% per year

The marketed outperformance number is twice the real outperformance. Multiply that by 25 years of compounding and the apparent value of the strategy is wildly inflated.

This isn't a marketing accident. It's a deliberate convention that flatters active managers. Anyone selling investment products knows the convention. Most retail investors don't, which is the whole point of the convention.

How to spot the trick

When evaluating any portfolio's performance against a benchmark, look for two phrases:

"S&P 500 Total Return" or "S&P 500 TR" in the fine print. This is the honest comparison. The benchmark includes dividends.

"S&P 500" with no modifier. This is the price-only version. Comparing your portfolio's total return to this is a 1.5% to 2% per year inflation of your apparent outperformance.

If a portfolio's marketing materials say things like "we beat the S&P 500 by 4% per year," ask which version of the S&P 500. If they can't tell you, or if they say "the S&P 500" as if there's only one version, you're looking at the inflated comparison.

The same trick applies to any benchmark. The Russell 2000, the MSCI EAFE, the Nasdaq Composite: all of these have price and total return versions. Always confirm which one is being used in the comparison.

Why we use S&P 500 Total Return

Every Advising Alpha portfolio is benchmarked to the S&P 500 Total Return. We've been explicit about this from the start. The reason is simple: we're not interested in flattering our outperformance. We want our members to see the honest comparison.

This means our published outperformance numbers are smaller than they would be against a price-only benchmark. Core 20's 25-year outperformance over the S&P 500 TR is meaningful but not enormous. If we were comparing against price-only S&P 500, the numbers would look 1.5% to 2% better per year, which compounds into double the apparent dollar advantage. We don't do that. We compare against total return because that's the math that matters to our members' actual outcomes.

This is also why we cite "$10,000 invested in 2001 grows to $X" type numbers using total return for both the portfolio and the benchmark. If the benchmark is price-only and the portfolio is total return, the dollar comparison is misleading. The honest comparison uses the same convention on both sides.

The bottom line

Total return is the measure of investment performance that includes dividends. Price return excludes them. The gap for U.S. stocks is roughly 1.5% to 2% per year. Compounded over 25 years, that's the difference between $10,000 growing to $68,000 (price-only S&P 500) or $108,000 (total return S&P 500).

The most common dishonest comparison in retail investing is portfolio total return vs. benchmark price return. This inflates apparent outperformance. Every reputable performance comparison uses total return on both sides.

Whenever you're evaluating any investment performance comparison, look for the words "Total Return" or "TR" in the benchmark. If they're missing, the comparison is probably less impressive than it looks. If you're comparing your own portfolio's returns to a benchmark, make sure you're comparing apples to apples.

The 1.5% per year gap between price and total return seems small. Over a career it's the difference between average wealth and significantly more wealth. That's how compounding works. The small details matter more than the headline.