How much do dividends contribute to long term Sensex returns?

Published: July 26, 2023 at 6:00 am

At freefincal, we have often used the Sensex price returns to portray risk via rolling lump sum and SIP returns. We have added 2% to the price return to account for dividends. This is because the price data starts from 1970 while the total returns data (that assumes dividends are reinvested without tax begins only from 1996.

This severely limits the illustration of return spreads, their cyclic nature and the inherent risk. So the price return + 2% seemed like a good idea. However, this was an arbitrary addition. How accurate is this? Is this too much or too less?

We take Sensex TRI and Price data from Aug 1996 and compute the 10-year and 15-year return differences to find out.

Let us first look at the evolution of the two indices. Dividends have a big role to play. We have already discussed this for the S&P 500: The magic of reinvested stock dividends!

Evolution n of Sensex TRI and Sensex Price index
Evolution n of Sensex TRI and Sensex Price index

These are the ten-year rolling returns.


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10 year rolling returns of Sensex TRI and Sensex Price index
10-year rolling returns of Sensex TRI and Sensex Price index

What return can I get over ten years of equity investing? The honest, data-driven answer is no one knows! The solution to this uncertainty is goal-based portfolio management.

This is the return difference over ten years.

10 year Sensex TRI return minus 10 year Sensex price return
10-year Sensex TRI return minus 10-year Sensex price return

Notice that the dividend contribution has distinctly decreased. There is no point taking the “average” of this set when the spread is so wide.

These are the 15-year rolling returns.

15 year rolling returns of Sensex TRI and Sensex Price index
15-year rolling returns of Sensex TRI and Sensex Price index

The above “no one knows” still applies over 15 years.

This is the return difference over 15 years.

15 year Sensex TRI return minus 15 year Sensex price return
15-year Sensex TRI return minus 15-year Sensex price return

The same trend as above is seen over 15 years too.

In summary, adding a constant 2% to the Sensex price return is technically incorrect in representing the effect of dividends. However, that 2% represents an error on the side of caution when trying to learn about past risk and, therefore, reasonable with the above data acting as a caveat.

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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