Behind the index numbers

The S&P/TSX composite index may be the main measure of the stock market in Canada, but it has one important flaw: it ignores dividends.

If you read the business section of newspapers or watch the nightly news, you’ll be familiar with the main measure of the stock market in Canada — the S&P/TSX composite index (TSX). For example, on August 13 it was down 11.5 points to close at 15,262.73. But how do they come up with this number?

The TSX index is a stock price index that measures the current market value of 251 large Canadian companies and income trusts. The total is divided by a complicated weighted average of those stocks to come up with a current value. Since it is easy for a computer to update market values as stock prices change, the value of the TSX index is in constant motion during the hours the stock market is open.

But here’s the key point: the S&P/TSX composite index regularly quoted in the media ignores dividends. That is hugely significant because when you invest in equities, you’re in not just for the capital gains but also for the dividend income.

The equivalent index that does include the effect of dividends is called the S&P/TSX composite total return index (TSX TR). This is the one we should focus on to analyze the stock market in Canada.

Both indexes include the same companies and income trusts, but the TSX TR index assumes any dividends declared by the member companies are reinvested in the index.

Let’s look at the average annual return of the TSX index versus the TSX TR index for the past 10 to 50 years (see table at right). Remember, these figures exclude investment fees and income taxes, so they represent an ideal situation.

It’s interesting to note that the dividend effect is an increase in rate of return of about 50% on a pretty consistent basis, which is because many of the companies in the index pay dividends. On August 12, of the 251 companies in the index, 190 (76%) had paid a dividend.

As you can see, the TSX and the TSX TR indexes have consistently produced excellent results, but let’s look at what has happened recently. The TSX index peaked on June 18, 2008, at a value of 15,073. By March 9, 2009, it had plunged to a value of 7,567. That was a loss of about 50% of its value in less than a year. Remember that?

How long has it taken for the TSX index to recover to its former high in June 2008? Exactly six years to the day. On June 18, it reached 15,109 — exceeding the value on June 18, 2008, for the first time since then. That means that if you were in a mix of Canadian equities similar to the index, your rate of return for the six years was 0%.

Of course, if you measure from the pit of March 9, 2009, the rate of return to June 18 was 14% a year. Sounds great, but that would only apply if you had perfectly timed the market and invested at the bottom.

The TSX TR index peaked at 37,790 on June 18, 2008. Its lowest point after the crash was on the same day as the TSX index low — March 9, 2009 — when it reached 19,470. It actually fully recovered to the June 18, 2008, high for the first time on February 14, 2011, but it declined and bounced around over the next few years. On September 18, 2013, it reached 37,944, exceeding the June 18, 2008, level and rose from there. The average annual rate of return of the TSX TR index from March 9, 2009, to September 18, 2013, was almost 16%, a bit better than the TSX index.

So while the indexes have done very well over the long term, the short-term results are much more volatile. It could be argued that for individuals saving for retirement, the shorter period of time is more significant. In other words, you probably have a key decade — how well your retirement savings perform in the last 10 years before you retire is crucial, since you’ll likely have the most amount of money saved in your life and are hopefully adding good amounts to it since the kids have moved out. If you have significantly invested in equities you are taking a big chance. Will the timing be right to give you double-digit returns or will you be stuck with the low returns of a lost decade?

About the Author

David Trahair

David Trahair, CPA, CA, is a personal finance author and speaker ( His latest book is The Procrastinator’s Guide to Retirement.

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