Recent media articles have reported that the S&P/ASX 100 (Index: ^AXTO) (ASX: XTO) has delivered annual returns of just 1.1% per annum over the past decade.

That’s a shocking return – particularly for investors nearing or entering retirement – and is less than inflation, and less than you can get in a high-interest bank account.

So should investors have stashed their cash in the bank in 2006 instead?

Actually no.

What the media reports fail to mention is that the return doesn’t include dividends, or that many investors would have invested in individual companies, rather than the index. Had investors instead chosen to invest in the current Top 10 stocks and reinvested their dividends, they’d have seen an average annual return of 7.5%. That’s still not great – but is certainly much better than the index’s 1.1%.

Company Price return (total) Including dividends Annualised
Commonwealth Bank of Australia (ASX:CBA) 71.1% 202.3% 11.7%
BHP Billiton Limited (ASX:BHP) -31.9% -1.5% -0.2%
Westpac Banking Corporation (ASX:WBC) 30.6% 135.3% 8.9%
National Australia Bank Ltd (ASX:NAB) -26.1% 47.9% 4.0%
Australia & New Zealand Banking Group (ASX:ANZ) -9.4% 59.4% 4.8%
Rio Tinto Limited (ASX:RIO) -41.1% -1.2% -0.1%
CSL Limited (ASX:CSL) 515.8% 640.7% 22.2%
Telstra Corporation Ltd (ASX:TLS) 42.4% 189.8% 11.2%
Wesfarmers Ltd (ASX:WES) 10.8% 107.4% 7.6%
Woolworths Limited (ASX:WOW) 13.1% 67.7% 5.3%
Average 57.5% 144.8% 7.5%

Source: Data provided by S&P Global Market Intelligence

Put another way, an investor would have more than doubled their return over the past decade by simply investing 10 equal amounts in each of these 10 stocks, signing up for the dividend reinvestment plans and forgetting about them.

It also shows the importance of dividends and reinvestment. While National Australia Bank’s share price has sunk 26% in the past decade, reinvesting dividends would still see an investor earning 4% annualised returns over the past decade – all through the power of dividends and compounding.

Foolish takeaway

Don’t be fooled (lower case ‘f’) by media reports suggesting the performance of the Top 10 companies has been abysmal over the past decade. When you consider that period included the share market plunging more than 40% during the GFC, an annualised return of 7.5% is nothing to sneeze at.

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Motley Fool writer/analyst Mike King owns shares in CSL, Telstra Corporation, Wesfarmers and Woolworths. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.