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 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.
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.
How to calculate total fund return? ›
You can calculate the return on your investment by subtracting the initial amount of money that you put in from the final value of your financial investment. Then you would divide this total by the cost of the investment and multiply that by 100.
How to calculate total return calculator? ›
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 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 to calculate return value? ›
Return on investment (ROI) is an approximate measure of an investment's profitability. 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. ROI has a wide range of uses.
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.
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.
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 to calculate expected return? ›
An expected return is calculated by multiplying potential outcomes by the odds of them occurring and then totaling these results. Expected returns cannot be guaranteed. The expected return for a portfolio containing multiple investments is the weighted average of the expected return of each of the investments.
What is the formula for calculating the return on total assets? ›
The Formula for Return on Total Assets – ROTA Is
To calculate ROTA, divide net income by the average total assets in a given year, or for the trailing twelve month period if the data is available. The same ratio can also be represented as the product of profit margin and total asset turnover.
What is the equation for total return? ›
How to Calculate Total Return. To calculate total return, first determine your cost basis for the asset or portfolio of assets in question. Subtract the current value of the investment from the cost basis, add the value of any income earnings. Take the resulting figure and multiply by 100 to make it a percentage figure ...
What is the total return method? ›
The total return of an investment includes both the capital gains and the income that it generates. As a strategy, the total return approach involves producing the highest possible return on investment. To put it simply, total return = (ending value – starting value) + earnings in that period.
What are the two parts of a total return calculation? ›
These two components of return are income, which includes interest payments on fixed-income investments, dividends from stocks, or distributions that an investor receives, and capital appreciation (i.e. the increase in the value of an asset or security, which represents the change in the market price of the same) ...
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 average total return? ›
For the arithmetic average return, one takes the sum of the returns and divides it by the number of return figures. The average return tells an investor or analyst what the returns for a stock or security have been in the past, or what the returns of a portfolio of companies are.
What is the formula for total net return? ›
Net Return = Gross Return – Cost of Investment.
