Stocks · Intermediate · 5 min

Price vs. total return index

You can explain the difference between a price index and a total return index and estimate how much dividends add over the long run.

Same market, two lines

Look up the long-term chart of a stock market in two different places and you may see two very different results. One line ends far above the other. Both are correct.

The difference is a single question: are dividends included? It sounds like a detail. Over decades it becomes one of the biggest numbers in investing, and it is the reason many comparisons you read are unfair.

Dividends in or out

A price index follows only the prices of its shares. When a company pays a dividend, its share price drops on the ex-dividend date, as you saw in the lesson on dividends. The price index drops with it, and the dividend itself is simply ignored.

A total return index assumes that every dividend is reinvested in the index. The dividend is not lost: it buys more shares, which earn returns of their own. Over time, this compounding effect grows larger and larger.

Index providers usually publish several versions of the same index:

a price version, without dividends,
a gross total return version, with all dividends reinvested,
a net total return version, with dividends reinvested after withholding taxes.

Which version is the famous one differs. The S&P 500 is usually quoted as a price index. The DAX is unusual: its headline version is a total return index. STOXX notes that the DAX is one of the few major country indices whose most popular version includes dividends. Other markets, such as many in Europe and Asia, are usually quoted as price indices.

This matters most when you compare. A fund or ETF that holds the shares receives the dividends. Comparing it with a price index makes it look better than it is. A fair comparison uses the total return version.

432 vs. 783

A fictional market: share prices rise 5% a year on average, and companies pay dividends of 2% a year.

Price index: 100 grows to about 432 after 30 years.
Total return index: with dividends reinvested, 100 grows to about 783.

The total return version ends about 81% higher. A dividend yield of only 2% a year, reinvested and compounded, almost doubles the end result. Taxes and costs would reduce both numbers in practice. The same logic works in reverse for a single year: in a year when prices are flat, a total return index with a 2% dividend yield still rises about 2%, while the price index shows no gain at all. Looking only at the price line would hide that part of the result.

Common mistakes

Comparing an investment with a price index. Use the total return version.
Comparing two countries' indices of different kinds. A total return DAX will look stronger than a price index elsewhere.
Ignoring the version in a fund's fact sheet. It states which index version the fund is measured against.
Mixing gross and net versions. A net total return index is lower than the gross one by the withholding taxes.
Assuming dividends don't matter. Over long periods, they are a large part of stock market returns.

The takeaway

A price index ignores dividends, a total return index reinvests them. Over decades, the gap becomes huge, so always compare the same kind.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the line that includes reinvested dividends.

Tap the chart.

The total return line reinvests the dividends, so they earn returns of their own.
2Which version of the DAX is the one usually quoted?

STOXX notes that the DAX is one of the few major country indices whose most popular version includes dividends.
3A fund that tracks a price index shows a return close to the index plus about 2% a year. Why could that be?

Comparing a fund with dividends against a price index flatters the fund. Compare it with the total return version.
4What is a net total return index?

STOXX publishes gross versions with full dividends and net versions after withholding tax.

of 4 correct.