The local sharemarket just hit a record high, or did it?

Last month the NZX 50 index hit a fresh record high, finally surpassing the previous peak from January 2021.

It was a long time coming.

Other sharemarkets recovered from their post-COVID hangover much more quickly, but we’ve taken almost five years.

At first glance, this would all suggest that our market has regained all its lost ground, surpassed the previous market peak and pushed on to bigger and better things.

However, that’s not quite so.

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The NZX 50, our key sharemarket index, is different to many of the other benchmark indices across the world in one important way.

It’s a “gross” index, which means it includes dividend payments as well as taking into account changes in share prices.

All of the commonly quoted international indices, such as the S&P 500 in the US, the ASX 200 in Australia and the FTSE 100 in the UK are “capital” indices.

This means that they reflect only changes in share prices, whilst ignoring dividends.

When we exclude dividends paid and look at share prices alone the NZ market is still 13.9 per cent below the early 2021 peak, some way off an all-time high.

There’s some logic to the way our index is calculated, and it’s not a matter of the NZX trying to fudge the numbers.

The New Zealand sharemarket has always been a high dividend paying market compared with international markets where dividends are much lower.

Over the past 30 years more than 60 per cent of the return from NZ shares has come from dividends.

In contrast, US share investors get a far greater proportion of their return from rising share prices.

Being a high-income market isn’t a bad thing, and it partly reflects the dominance of stable, mature businesses like those in the utilities, infrastructure and real estate sectors.

Another important reason for this dynamic is our relatively unique tax system, and our imputation regime.

When New Zealand companies pay tax on their profits, they accrue imputation tax credits.

They can attach these to the dividends they pay to shareholders, to ensure investors don’t pay tax a second time.

That means the dividend payments you’ll get from your New Zealand shares are close to tax free.

With the exception of Australia (which calls these franking credits) most other countries make investors pay tax on dividends from shares.

That’s why you’ll often see US companies doing share buybacks to distribute capital to shareholders, because it’s more tax efficient for them.

Returns are returns, and we shouldn’t be too concerned whether we receive them via income or capital growth.

But it does mean we need to be wary of comparisons with overseas indices.

When I make performance comparisons between different markets I add dividends to indices such as the S&P 500, to ensure these are “apples with apples”.

In practical terms, many investors will have recovered the losses of recent years, but only because of the income they have collected along the way.

We can also take some comfort that as share prices are still some way below the 2021 peak, the market is far from overheated, despite appearing to be at a “record high” on the surface.

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