What is total return? Definition and meaning

Total return is the total income earned, i.e., dividends plus capital gains, from an investment over a given period. In most cases, that period is 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 termsft.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. John 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%