The most common index used to measure the value of shares is a price index, such as the S&P/ASX 200 or the All Ordinaries. However, when looking at the total return from investing in shares, we should also take into account dividends. After all, price growth is not the only return we receive on share market investments.
Enter the accumulation index.
The All Ordinaries Accumulation index currently sits at around 43,000 – significantly higher than the more popularly used All Ordinaries Index – because it takes into account the dividends paid by companies to their shareholders and assumes that these dividends are reinvested.
It is interesting to note that when the accumulation index was first established on 31 December 1979, it had a base level of 1,000. This means that since inception, the index has increased 43 fold, highlighting the enormous value of dividends paid by companies over time.
In contrast, the All Ords index has increased over the same period from a starting level of 500 to approximately 5,200 – a (mere) 10-fold increase.
One of the main reasons SMSF trustees invest in shares is to gain income from dividends. So while the price index may be useful for tracking day-to-day price movements in the stock market, the accumulation index arguably provides a better overall indication of the investment return. For instance, accounting for dividend payments can increase a share portfolio’s total returns by around 5% pa.
