Total return is the total income earned – dividends plus capital gains – from an investment over a given period, generally one year. Total return is typically expressed as a percentage of the amount that was invested. It is the sum of all the different benefits resulting from investing in an asset, including any change in that asset’s market value – capital gains – as well as income paid to the investor.
With the equation below, you can work out the percentage of the invested amount:
Capital gains ÷ Initial Investment x 100 = Total Return
The income usually consists of the dividends, interest, and securities lending fees. The term contrasts with price return, which only takes into account an investment’s capital gain.
According to the Financial Times’ glossary of business terms – ft.com/lexicon:
“Total return is the full return on an investment over a given period, including the income generated from dividend, interest or rental payments, and any gains or losses from a change in the asset’s market value.”
“This is normally expressed as a percentage of the purchase cost, annualized if the period is less than a year.”
Total return, as shown in this image, is the increase in the wealth you have, after adding the dividend you received from an asset to the appreciation in the value of that asset. In this case, it was 15.5%.
An example of total return
Imagine you purchase 100 shares of John Doe Inc. stock at $40 per share for an initial value of $4,000. Joh Doe shares pay a 5% dividend ($200), which you reinvest, i.e. you purchase five more shares. After twelve months, John Doe’s share price appreciates to $44.
What is your total return? You divide the total investment gains by the investment’s initial value, and then multiply the result by 100 to get a percentage return.
– Total investment gain is $620 (105 shares x $44 per share = $4,620. Minus the initial value of $4,000 = $620 gain).
– The investment’s initial value was $4,000.
The equation is:
$620 (gain) ÷ $4,000 (initial investment) x 100 = 15.5%
Your total return is 15.5%.
A ‘Total Return’ stock market index is the calculation of the stock values if the dividends had been reinvested.
Total return fund
This is a fund that aims to maximize gains from both generating investments, such as government bonds and dividend-paying shares, while at the same time aiming to invest in assets which gain in value.
If you invest in a total return fund, you should reinvest your income gains. The investment’s final return is the total generated by the capital appreciation of the assets that the fund invests in, plus the income they have provided.
Video – What is total return?
This Get The Lolly video explains what total return is using simple language and easy-to-understand examples. The speaker warns that while it can help you compare different investments, it should not be taken at face value, especially if you are investing for income.