S&P 500: Total and Inflation-Adjusted Historical Returns

Historical prices for the Standard & Poor's 500 stock-market index can be obtained from websites like Yahoo Finance if we use the ^GSPC ticker, or Google Finance if we use .INX. Yahoo can even graph the series since 1950. Nevertheless, to study the real profitability of stock investments, we need to average and graph not just the price, but the effect of dividend distributions and inflation too. That is the purpose of this work.

Total Return

According to Standard & Poor's, the dividend component was responsible for 40% of the total return of the last 80 years of the index. If we are to analyze the historical profitability of stock investments, this portion cannot be neglected. Therefore, it is interesting to graph and average the total return (meaning the increase in value if all dividends were reinvested) instead of the evolution of just price. The following graph shows total return of the S&P 500 index since 1950:

The effect of investing $1 in 1950 is shown, in one case with all dividends reinvested (orange curve), in the other without (blue curve). As can be seen, reinvesting all dividends produced about 8 times the return. Note that the y-axis is logarithmically scaled, for better appreciation of the earlier trends.

Inflation and Dividend-Distribution Trends

Phrases like "one dollar invested in 1926 would be $3000 today" are often heard regardless of the fact that a 1926 dollar has little relation with a 2008 dollar. To really evaluate how much can be earned through stock investments in a long period of time, the effect of inflation has to be extracted from the picture, by adjusting the intermediate results according to an index such as the Consumer Price Index published by the U.S. Department of Labor.

The following graph shows inflation per year, together with annual dividend distribution rates. Some interesting trends can be seen in both:

As we observe in the graph, in recent years the stock market delivers more of its profits through capital gains. You can also see the high inflation rates that occured in the 1970s.

Inflation-Adjusted Data

Incorporating inflation data to total returns and relative prices produces the following inflation-adjusted graph of relative prices and total return:

As can be seen, the stock market was very profitable, in real terms, in the 1950 to 1965 and 1983 to present periods. On the other hand, it didn't perform well from 1965 to 1983. Still, during some of those years, it partially worked as a shelter from inflation.

Averages per Decade

The following table shows average annual results for each decade:

	Price Change	Dividend Dist. Rate	Total Return	Inflation	Real Price Change	Real Total Return
1950s	13.2%	5.4%	19.3%	2.2%	10.7%	16.7%
1960s	4.4%	3.3%	7.8%	2.5%	1.8%	5.2%
1970s	1.6%	4.3%	5.8%	7.4%	-5.4%	-1.4%
1980s	12.6%	4.6%	17.3%	5.1%	7.1%	11.6%
1990s	15.3%	2.7%	18.1%	2.9%	12.0%	14.7%
2000-2007	0.0%	1.7%	1.4%	2.8%	-2.7%	-1.4%
1950-2007	7.9%	3.7%	11.8%	3.8%	4.0%	7.6%

Notes: Figures for dividend distribution rates in the previous table present high uncertainty, of about ±5%. Geometric averages were calculated for price changes, total returns and inflation. Raw data for this work was obtained from the following sources: