What Is Total Return?
Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends, and distributions realized over a period. Total return accounts for two categories of return: income including interest paid by fixed-income investments, distributions, or dividends and capital appreciation, representing the change in the market price of an asset.
Key Takeaways:
- Total return is the actual rate of return of an investment or a pool of investments over a period.
- Total return includes interest, capital gains, dividends, and realized distributions.
- Total return is expressed as a percentage of the amount invested.
- Total return is a strong measure of an investment’s overall performance.
Understanding Total Return
Total return is the amount of value an investor earns from a security over a specific period, typically one year when all distributions are reinvested. The total return is expressed as a percentage of the amount invested. For example, a total return of 20% means the security increased by 20% of its original value due to a price increase, distribution of dividends (if a stock), coupons (if a bond), or capital gains (if a fund). It is a strong measure of an investment’s overall performance.
Significance of Total Return
Some of the best dividend stocks have low growth potential and produce small capital gains. Basing an investment’s return on capital gains alone does not take into consideration price increases or other methods of growing the stock’s value. For example, an investor buys shares of Company B, and the share price increases 24.5% in one year. The investor gains 24.5% from the price change alone. Since Company B also paid a dividend during the year, adding in the stock’s yield of 4.1% to the price change, the combined return is 28.6%.
The investor may wish to calculate dividend-adjusted return. This figure considers both the stock price appreciation and its dividends. The dividend-adjusted return provides a more accurate valuation of a stock's return.
Total return determines an investment’s true growth over time. It is important to evaluate the big picture and not just one return metric when determining an increase in value.
Total return is used when analyzing a company’s historical performance. Calculating expected future returns puts reasonable expectations on an investor’s investments and helps plan for retirement or other needs.
Average Annual Total Returns
When analyzing mutual fund performance, investors should analyze their average annual total returns for different periods. Comparing returns to a benchmark indicates how the fund has performed, relative to an index. When analyzing average annual total returns, it's important to remember:
- The numbers almost always reflect the reinvestment of dividends and capital gains distributions.
- Effects of sales charges may or may not be included. However, this information is disclosed with return numbers.
Example of Total Return
An investor buys 100 shares of Stock A at $20 per share for an initial value of $2,000. Stock A pays a 5% dividend the investor reinvests, buying five additional shares. After one year, the share price rises to $22.
To calculate the investment's total return, the investor divides the total investment gains (105 shares x $22 per share = $2,310 current value - $2,000 initial value = $310 total gains) by the initial value of the investment ($2,000) and multiplies by 100 to convert the answer to a percentage ($310 / $2,000 x 100 = 15.5%). The investor's total return is 15.5%.
FAQs
To calculate the investment's total return, the investor divides the total investment gains (105 shares x $22 per share = $2,310 current value - $2,000 initial value = $310 total gains) by the initial value of the investment ($2,000) and multiplies by 100 to convert the answer to a percentage ($310 / $2,000 x 100 = ...
What is the formula for calculating total return? ›
The formula for calculating total return is Total Return = (Ending Value – Beginning Value + Dividends or Interest) / Beginning Value * 100.
What is an example of a total return? ›
As a basic example, a stock that paid a 5% dividend yield relative to its purchase price, and which also increased in value by 5% over the first year you owned it, would have produced a total return of 10% over the one-year time period. Total returns can be calculated as a dollar amount, or as a percentage.
How to calculate expected total return? ›
An expected return is calculated by multiplying potential outcomes by the odds of them occurring and then totaling these results.
What is the formula for overall return? ›
To calculate the total return rate (which is needed to calculate the annualized return), the investor will perform the following formula: (ending value - beginning value) / beginning value, or (5000 - 2000) / 2000 = 1.5. This gives the investor a total return rate of 1.5.
What is the formula for the real total return? ›
The real rate of return is the actual annual rate of return after taking into consideration the factors that affect the rate like inflation and it is calculated by one plus nominal rate divided by one plus inflation rate minus one and inflation rate can be taken from consumer price index or GDP deflator.
How do I calculate my returns? ›
ROI is calculated by subtracting the initial cost of the investment from its final value, then dividing this new number by the cost of the investment, and finally, multiplying it by 100.
How to calculate monthly total return? ›
Take the ending balance and either add back net withdrawals or subtract out net deposits during the period. Then, divide the result by the starting balance at the beginning of the month. Subtract 1 and multiply by 100, and you'll have the percentage gain or loss that corresponds to your monthly return.
How do you calculate total accounting return? ›
Calculating Accounting Rate of Return
To calculate the accounting rate of return for an investment, divide its average annual profit by its average annual investment cost. The result is expressed as a percentage.
How do you calculate return on total cost? ›
Return on Cost Formula (ROC)
The formula to calculate the return on cost is the stabilized NOI of the underlying property divided by the total project cost. Where: Stabilized Net Operating Income (NOI) = Effective Gross Income (EGI) – Direct Operating Expenses.
Calculation Instances: Examples of Expected Return
The expected return ( ) will be calculated as: E [ r ] = ( 20 % ∗ 0.3 ) + ( 10 % ∗ 0.4 ) + ( − 5 % ∗ 0.3 ) = 6 % + 4 % − 1.5 % = 8.5 % This means that, according to the probabilities and potential returns, you can expect an average return of 8.5% on the investment.
What is a total return strategy? ›
Total return is a core-plus strategy designed to seek consistent, attractive returns across all market cycles via a multi-sector approach, while remaining benchmark-aware and retaining the general risk profile of conservative fixed income investments.
How do you calculate average total return? ›
For instance, suppose an investment returns the following annually over a period of five full years: 10%, 15%, 10%, 0%, and 5%. To calculate the average return for the investment over this five-year period, the five annual returns are added together and then divided by 5.
How is total return measured? ›
Understanding Total Return
The total return is expressed as a percentage of the amount invested. For example, a total return of 20% means the security increased by 20% of its original value due to a price increase, distribution of dividends (if a stock), coupons (if a bond), or capital gains (if a fund).
What is daily total return? ›
Returns as of the previous business day. Typically, only funds that report to NASDAQ will have a daily return the next day. Daily returns are calculated the same way as other total returns.
What's the formula for calculating total return quizlet? ›
The formula for calculating total return is (income + gains or - losses) / cost basis.
How do you calculate total return from annual return? ›
[ Total Return = (1 + annual return)^(number of years) ] Let's return to the example where a $10,000 investment grows to $12,000 over a five year period. The annual return is calculated as [ (12,000/10,000)^(1/5) – 1 = 0.0371 = 3.71% ].
What is the formula for total return on a property? ›
The Formula for ROI
To calculate the profit or gain on any investment, first take the total return on the investment and subtract the original cost of the investment. To calculate the percentage ROI, we take the net profit, or net gain, on the investment and divide it by the original cost:3.
