Anyway, my question has to do with how one judges the performance of a stock. Does anyone take into consideration dividends a stock may have paid when determining returns? For example:

StockA buy 100shs @$10, pays $50 annual dividend
StockB buy 100shs @$10, no dividend

After 5yrs StkA trading at $11.50 and StkB at $15. Which would you rather own?

Sorry for the longish post.

For example, I recently set up a portfolio which was:

76% Equities
24% Fixed Income

But further to that, the equities were from different markets. The weighted average benchmark actually looked like the following:

36% S&P/TSX Total Return Index
8% S&P500 Total Return Index
20% MSCI EAFE Index
22% MSCI EM Index
24% Scotia Capital Short Term Bond Index

This reflects the proportion of investments made within each market.

By taking the return of each index and multiplying it by the percentage of the portfolio those investments represent we can get a much more accurate benchmark. For example, if the returns were as follows for a 3 year period:

TSX: 11%
S&P500: 8%
EAFE: 8%
EM: 17%
SC Short Term Bond Index: 4%

Then multiplying the returns by the asset weights will give me my custom benchmark:

TSX: 11% Return x 36% Weight = 4%
S&P500: 8% Return x 8% Weight = 0.64%
EAFE: 8% Return x 20% Weight = 1.6%
EM: 17% Return x 22% Weight = 3.74%
SC STBI: 4% Return x 24% Weight = 0.96%

Add them all up: 10.94%

So that would be the benchmark against which to compare the portfolio. It doesn’t take much time, and the math is easy.

You can go further as well. If you pick dividend paying stocks, if you wanted to compare their returns to the overall TSX (because you think dividend paying stocks are better than the market) you can do that. If you want to test your ability to pick the BEST dividend paying stocks, then you would use the S&P/TSX 60 as the benchmark for those investments.

Note: I used the short term bond index because for that particular portfolio we setup a 5 year bond ladder with Canadian bonds only.

Also note that you can compare the beta of your portfolio with a known market’s beta, or again against a weighted average beta of the benchmark portfolio.

You would compare your portfolio’s beta against the beta of, say, the TSX to see if you could get a certain percentage of the returns and reduce beta – this might confirm that adding investments from other markets (while by themselves more volatile) would reduce long term risk.

You would compare your portfolio’s beta against the weighted average beta if you wanted to see if the investment picks within each market were less volatile than the markets’ average – to help assess your overall stock picking abilities.

Good read, thanks!

D4L