From January 2014 to December 2023, the S&P 500 price index went from 1,831 to 4,769, a 160% gain. But the total return index, which assumes all dividends are reinvested, went from 2,725 to 8,830 — a 224% gain. That extra 64 percentage points came entirely from dividends and their compounding. $1,000 invested in a total return fund became $3,240; without dividends, it would be only $2,600.
The mechanism is simple. The S&P 500 yields about 1.5–2% annually. When those dividends buy more shares during market dips, they supercharge the recovery. In 2020, for instance, dividends reinvested in March purchased shares at deeply discounted prices, and those shares appreciated dramatically over the next year.
If you're investing for the long term, always use total return as your benchmark. Price charts are incomplete. And in your own portfolio, automatic dividend reinvestment (DRIP) is one of the simplest, most powerful tools you have. It forces you to buy low without thinking about it.