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Why The Dow's New Highs Aren't New At All

"This week the Dow Jones industrial average has been hitting all-time highs." - Paul Krugman, New York Times, March 8, 2013

Unfortunately, the Times' Nobel Laureate is perpetuating a misperception that haunts investors in two ways. He is ignoring dividend income, and implying that 30 securities chosen by a committee represent the U.S. equity market. He would make his case better if he chose his indexes more carefully.

The new highs in the Dow Jones industrial average are old news-nearly 14 months old. On a total return basis, including dividend payments and the compounding from reinvesting them, the Dow, and the SPDR Dow Jones Industrial Average Trust (NYSEArca:DIA), the ETF that tracks it, regained its October 2007 high on Jan. 19, 2012. As of March 7 of this year, DIA's total return level was already 13.5 percent above its 2007 highs.

Krugman took the easy path of quoting the price levels of the index. The commonly quoted price-only version of the Dow Jones measures today's price of the Dow 30 stocks, and compares it to past prices.

But every one of the Dow 30 stocks pays dividends. DIA's trailing 12-month dividend yield is 2.32 percent as of March 7. Investors benefit from those dividends, either by taking the cash, or by reinvesting it back into the market. Historically-and crucially-dividends have contributed the lion's share of equity market returns.

Total return indexes include dividends, as well as the compounding from reinvesting those cash flows back into the constituent securities. Indexers almost always publish both price and total return index levels, but the media likes simplicity, and price returns are simple.

There's another reason to bristle at the "Dow Reaches New Highs" headlines. The Dow Jones industrial average doesn't really represent the U.S. equity market. Look at this chart:

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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