The dividend benefit you may not have heard of

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Even if you're sick of hearing about the wonders of dividend stocks, pay attention.

Blue chip dividend stocks have powered the Canadian market for years now, producing both steady capital gains and ever-increasing flows of dividend income that in many cases have kept well ahead of inflation. Now for a dividend benefit you may not have heard of yet: When you combine share price gains with dividends into a total return, the Canadian stock market has performed far better than has been widely reported.

It was only a few weeks ago that the S&P/TSX composite index finally joined U.S. indexes in surpassing the old highs reached before the global financial crisis in 2008. This milestone was duly reported in the financial media, although it was actually old news. It was back in late 2010 that the S&P/TSX total return index surpassed its May 2008 high. A rotten 2011 for Canadian stocks set the total return index back some, but it's been making new highs all year.

The long-term scorecard: A five-year cumulative gain of 46 per cent for the S&P/TSX composite index and a 68-per-cent gain for the total return index. Over the year to the end of June, the composite index was up 25 per cent and the total return index was up 28 per cent. This is the long-term benefit of ensuring you have exposure to stocks paying a healthy dividend.

The total return index's results put a brighter shine on the Canadian stock market, but they also add a burden for investors and their advisers. When gauging Canadian market portfolio returns, the total return index should always be used, not the easier-to-beat composite index. It's not uncommon for investment firms to compare the returns of their products to the composite index. If you see this happening, ask for the more complete picture you get from the total return index.

If you're evaluating your own stock picks, combine share price gains and dividends into a total return and then use the TR index as your benchmark. You're going easy on yourself if you use the composite index. Tip: The symbol for the S&P/TSX total return index is TSXT-I.