What is Total Return?
The actual rate of return on an investment or portfolio of investments over some time period is the total return.
The term “total return” refers to the sum of an investment’s interest, capital gains, Dividends, and distributions over some time frame.
Income, such as interest from fixed-income investments, distributions, or dividends, and capital appreciation, which is the change in market price, are all factored into the total return calculation.
KEY POINTS
The actual rate of return on an investment or portfolio of investments over a given time frame is known as the total return.
Interest, appreciation in value, dividends, and distributions received in cash are all components of total return.
The return on investment (ROI) is a percentage of the initial capital.
The total return on an investment is a reliable indicator of its success.
Understanding Total Return
The total return on a security is the increase in value over a given time period, usually a year when distributions are reinvested.
The return on investment is shown as a percentage.
A 20% total return, for instance, indicates that the value of the security increased by 20% after factoring in any price appreciation, dividends (in the case of a stock), coupons (in the case of a bond), or capital gains (in the case of a mutual fund).
It’s a reliable indicator of how well an investment has done over time.
The Importance of Total Return
The best dividend stocks often don’t offer much in the way of growth or capital gains.
Return on investment calculated solely through capital gains ignores dividends, interest, and other sources of growth in stock value.
To illustrate, suppose that an individual invests in shares of Company B and, after a year, those shares increase in value by 25%.
Simply due to the price increase, the investor makes a profit of 24.5%. Since Company B also distributed dividends during the year, the total return is calculated by adding the dividend yield of 4.1% to the price change.
The true growth of an investment is measured by its total return.
When calculating a value increase, it’s crucial to look at the big picture and not just one return metric in isolation.
When looking at a company’s past performance, total return is a useful metric to use.
Investors can better prepare for retirement and other life events by projecting their investments’ future returns using an expected value calculation.
Average Annual Total Returns
Investors should compare the average annual total returns of a mutual fund over various time periods to assess its performance.
The relative performance of a fund can be measured by comparing its returns to an established index.
Consider the following when evaluating yearly total returns on average:
Dividends and capital gain distributions are typically reinvested, as shown in the figures.
Sales tax implications are not guaranteed to be factored in. This data, however, is made public with refund figures.
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Total Investment Return Example
An initial investment of $2,000 is made in 100 shares of Stock A at a price of $20 per share.
In response to Stock A’s 5% dividend, the investor purchases five more shares. The stock price increases to $22 after a year.
Total investment return is calculated by dividing the amount gained from selling shares (105 shares x $22 per share = $2,310 current value – $2,000 initial value = $310 total gains) by the amount initially invested ($2,000) and then multiplying the result by 100 (15.5%). The total rate of return for the investor is 15.5%.
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