For one thing, the All-Share index - a more meaningful measure of the general performance of UK equities - hit a record high some time ago, thanks to good rises in smaller stocks. In fact, it surpassed its 1999 high back in 2007, and has since hit new peaks.
For another thing, it should not be news that share price indices are at record highs. Put it this way: dividends tend to rise smoothly over time, not least because firms are loath to cut them. If prices are a stable function of expected dividends, we should therefore see them hit record highs very often. "Stock market at record high" should be much less newsworthy than "market below all-time peak."
That this is not the case corroborates what Robert Shiller pointed out back in 1981 - that prices are more volatile than the underlying fundamentals and so prone to bubbles and busts.
But there’s something else. In one very important sense, the FTSE 100 has been hitting record highs very often over the past two years.
I refer to the total return index, which measures dividends as well as price performance. Although the FTSE 100’s price index is still 1.5 per cent off the level it reached in December 1999, the total return index is 58.6 per cent higher than it was then.
This reminds us of an old and important fact - that dividends matter, and over the long-run they matter a lot because a dividend income of 3 or 4 per cent compounds nicely over time.
Now, this does not mean you should prefer higher-yielding stocks. There might be a case for doing so, but if there is it lies in the fact that such stocks are under-priced relative to others - which is another story.
Instead, it reminds us that dividends represent a hefty chunk of returns over time. This is true even in bull markets. For example, in the 10 years to December 1999, the FTSE 100’s price index rose by 186 per cent, but the total return index rose by 329 per cent - which implies that dividends accounted for around two-fifths of total returns.
This is likely to remain the case. Let’s assume the market is now fairly valued, so the dividend yield won’t change over time from the current 3.2 per cent on the All-Share index. Let’s assume too that dividends rise in line with money GDP, which rises by 4.5 per cent per year - roughly 2 per cent real growth plus 2.5 percentage points of price rises. We can therefore expect total returns of 7.7 per cent - a 4.5 per cent price rise plus 3.2 per cent yield. This implies that dividends will account for around two-fifths of total returns.
And herein lies a case for long-term passive investing. In holding the index and reinvesting dividends, we are ensuring that we take advantage of the power of dividend income to compound over time.
