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Canadians are looking forward to Thanksgiving and for fresh apple pie to prove its superiority to canned-squash-product pie once again.
Speaking of apples, retirees often adopt an apple-picking method when it comes to their investments. They harvest their dividends without cutting into their stock holdings, which amounts to a spend-and-hold approach.
Stock market indexes can help to reveal the benefits – and downsides – of simple spend-and-hold approaches. The indexes come in two flavours, with price indexes tracking capital gains (not including dividends) and total return indexes accounting for reinvested dividends.
In practice, price indexes are typically quoted on TV and in the news when following the market’s day-to-day ups and downs, which aren’t impacted much by dividends. On the other hand, total return indexes are usually employed when considering long-term returns, but can provide an overly optimistic picture to those who spend, rather than reinvest, their dividends.
Today’s focus is on the Canadian stock market, which is tracked by the S&P/TSX Composite Index, a price index, and its counterpart, the S&P/TSX Composite Total Return Index. The former excludes dividends while the latter includes them. But both indexes own the same basket of stocks, which includes more than 200 of the largest stocks in the land.
Dividend reinvestment makes a big difference when it comes to long-term returns. The S&P/TSX Composite Total Return Index climbed by an average of 9.30 per cent annually from the end of January, 1956, through to the end of August, 2025. The price index climbed by an average of 5.91 per cent annually over the same period.
Reinvesting dividends boosted the former by an annual average of 3.39 percentage points over the period. In addition, the indexes’ portfolio generated an average yield of about 3 per cent over the period – with a good deal of variation along the way.
Investors might think about chowing down on a dividend yield of about 3 per cent annually while still picking up an average annual capital gain of almost 6 per cent. But it is important to factor in inflation before heading to the market’s Thanksgiving feast.
Canadian inflation averaged 3.59 per cent annually from the end of January, 1956, through to the end of August, 2025, which takes a big bite out of returns. Adjust for inflation and the total return index gained an average of 5.52 per cent annually over the period, while the price index climbed by an anemic 2.24 per cent annually.
You can examine the long-term inflation-adjusted capital gains of the price index (not including dividends) in the accompanying graph, which includes a very long dry spell in the early decades.
Norman Rothery: Portfolios for dividend investors to ponder
For instance, the inflation-adjusted price index ended January, 1993, just below the same price it reached 36 years earlier at the end of January, 1957. An investor who retired at 65 in early 1957 would not have seen lasting capital gains from the market, after accounting for inflation, until they were older than 101.
The record poses problems for retirees. On the one hand, a yield of roughly 3 per cent is likely too little for many people. But selling shares can hurt in periods like those seen from the late 1950s to the early 1990s. It’s one reason why the 4-per-cent withdrawal-rate rule was created, which allows for share sales in some circumstances. It also highlights the dangers of opting for higher withdrawal rates.
Alas, the problems don’t end with inflation because fees and taxes lurk in the wings.
It wasn’t long ago when Canadian index funds were rare and stock mutual funds charged fees of about 2 per cent of assets annually, which could really cut into an income of 3 or 4 per cent of assets annually. Fortunately, now investors can buy exchange-traded funds, or ETFs, that charge much less.
For instance, the iShares Core S&P/TSX Capped Composite Index ETF XIC-T has an annual fee (MER) of 0.06 per cent. Mind you, in less cheerful news, the ETF’s 12-month trailing yield was a modest 2.3 per cent at the start of October, thanks to the market’s recent bull run.
Taxes also haunt retirees but they vary from investor to investor, which makes them a tricky topic for another day.
While retirees might hope to feast on a surging stock market, they should be wary of bad apples in the form of inflation – or worse. Along the way, enjoy the harvest season and, perhaps, the odd slice of pumpkin pie.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
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