The media has a complex relationship with capital markets. It knows capitalism is important, both for business and for individual savers, but finds the whole process far too confusing and so ends up continually referring to a few things it thinks it understands. That is why there is a constant focus on salaries and profits with little reference to risk, capital employed, investment, the competitive environment or anything that is not large and obvious. Things like dividends expressed in pence per share just seem trivial compared to a million pound bonus.

Financial intermediaries use the media as an easy reference point for explaining the world of personal finance to their clients and the investing public at large. In particular most people refer to the capital value of stock market indices such as the FTSE 100. Looking at that over the last thirteen years they feel justified in saying it has been an asset class that has delivered poor returns.

However, that statement totally misses the point and simply demonstrates they have grasped the wrong end of the stick. On a total return basis the FTSE 100 is nearly 50% higher than it was at the turn of the millenium. The FT All Share is up over 60% on the same basis. The market has not been flat or down, it has delivered good returns. And that includes the corporate disasters experienced by BP and the banking sector. Some might claim that selecting the market peak in 1999 is bound to favour dividends at the expense of capital growth.

So let’s look at a different starting date; say 16th March 2003 which was the trough after the tech bubble. Since then the simple FTSE 100 index has grown an impressive 192.75%. Not bad. But not as dramatic as the 276.5% recorded by the FTSE 100 Total Return. Even over this fairly short period of strong capital growth dividends provided 30% of the total return.

This discrepency is simply explained by the almost unseen, but unrelenting force of dividends that have been paid out, reinvested and grown again by the alchemy of compound interest. In other words, even in this relatively short space of time dividends have provided one third of the total return of the UK stock market. Whisper it quietly, but the secret of equity investing is not capital…

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