From a Motley Fool analysis mailing:
The news is all around: The S&P 500 keeps hitting all-time highs and is closing in on 3,000 for the first time.
But in reality, the S&P 500 passed 3,000 a few years ago, by a measure that’s much more reflective of the stock market’s true performance. I’m talking about the S&P 500 total return index, which topped 3,000 in 2013 and now sits around 5,700.
The quote for the S&P 500 that you most often see on financial websites and hear about on the news is just the price return of the stocks in the index. It doesn’t factor in dividends — and so it ignores a crucial component of what you can earn by investing in stocks.
How important are dividends? Over the past decade, the S&P 500 returned 133% on a price-only basis. But looking at the index’s total return, its performance jumps to 189%. … [Robert Brokamp, Rule Your Retirement, The Motley Fool]
For an investment professional, this is a part of the financial landscape, something worth discovering as if it were a natural feature.
But how about the rest of us? We can consider it a signal concerning the behavior of the American economic system, although I’m somewhat hesitant to extend it to the international financial system. A dividend is primarily, but not exclusively, considered a proof of the profitability of a business, because it’s money sent by the business to its shareholders. In most cases, the money is derived from the profits generated by the revenue it receives for the services it provides to its customer base.
So, if they’re going up, that means higher profits. For any individual company, that’s probably good, especially if the customer is receiving an excellent value for its money and the profits derive from efficiencies ethically created.
But Brokamp is talking about the market as a whole, so the fact that this aggregate entity is setting new records doesn’t necessarily mean great things. Depending on who you are, it may mean the ratio of price to cost for the generic service/product has gotten too high, i.e., the companies are finding it too easy to raise prices without serious blowback from competitors.
In other words, this may indicate we’re entering a monopoly situation. I’ve talked a little bit about this before, but not much. And, unfortunately, monopoly breakup is not currently part of our political culture, partly due to the influence of the libertarians, who steadfastly believe in the apparent logic that prices that are too high will naturally attract competitors that can supply better products at similar prices or similar products at lower prices. They acknowledge the moat problem[1], but sometimes I wonder if they recognize how important moats can be. I also find their model of humanity to be simplistic in view of our history of corporate collusion, aka price fixing. They presume that only competition will occur, which turns out to be highly unlikely, given the common businessman lust for easy profit.
Back to the topic, the increase in dividends may also continue due to the irresponsible tax reform of 2017, which appears to not be sparking any kind of business renaissance, but instead is resulting in share buybacks and increased dividends.
In the end, what is the ethical course for an investment advisor such as Brokamp in situations such as these? Are they responsible for looking at the big, big picture that says we may burn down the economy by not responsibly managing the behaviors of corporations, and call for taxes to be returned to a level in which we can hope, through prudent budgeting, to return the annual Federal deficit to manageable levels (it’s too much to hope to return to 2000, when a couple of years of no deficit incited the Republicans into a drunken orgy of spending), or should the financial advisor keep his eye close to the landscape and simply advise his readers to buy dividend stocks and ignore the bigger picture?
To me, the dangers of ignoring the bigger picture could be considered a violation of the ethical duties of a financial advisor, because the dangers to one’s investments due to poor management of government may grow larger, and warning of that is one of the responsibilities of a financial advisor.
So I have to wonder about the ethics behind that analysis.
1 The moat of a business is the cost of standing up a competing business, including physical facilities, human resources, intellectual properties (either secret or protected by law), and other things that escape my attention at the moment.
