Final answer:
Market indexes like the S&P 500 usually exclude dividend reinvestment in their performance calculation but total return includes both dividends and capital gains. Dividends were historically a larger part of returns but have been lower since the 1990s with capital gains typically being the larger contributor.
Step-by-step explanation:
Market indexes, such as the S&P 500, typically B. Exclude dividend reinvestment when reporting performance. This means they show the price movements of the stocks within the index but do not account for dividends that could be reinvested to purchase additional shares.
The total return from an investment in an index, however, includes both dividends paid by the companies and capital gains arising from increases in stock value. While indexes themselves do not usually reinvest dividends, it's important to note that many mutual funds and exchange-traded funds (ETFs) that replicate these indexes do offer a total return perspective by reinvesting dividends received.
Historically, dividends have served as a significant portion of the total return on stocks. For instance, from the 1950s to the 1980s, dividends averaged about 4% of a firm's stock value. However, this number has substantially decreased since the 1990s, with dividends often contributing only between 1% to 2% of the total annual return.
Capital gains often outweigh dividends, especially in the decades following the 1980s, but both remain important considerations when looking at the overall profitability of stock market investments.