What is Total Return?

Total return is like a blanket made with different colors of fabric…

When you sew a blanket, you don’t have to use a single type or color fabric. You can use multiple different types or shades. When put together, they all form a single blanket. In the same way, returns don’t all come for the same source. Some come in the form of appreciation in asset value while others might come in the form of income. Put together, they all form total return.

Total return is a measure of return, typically per year, that includes all of the sources of value that an investment produces, including income and appreciation (or decrease) in the value of the security. For example, someone who owns shares in a company may receive cash payments in the form of dividends and have the shares gain value. Total return includes both sources of value in the calculation.

Total return includes:

• Capital gains
• Interest
• Dividends
• Distributions

It also may or may not include commissions, taxes, and other sales charges. It’s important that investors take fees into account when comparing two investment options. One with higher total return, but higher fees, may offer worse performance.

To find the total return of an investment, you need to compare the value received from the investment to the amount originally paid. For example, if an investor buys a stock on the stock market for $100, receives a $5 dividend, and sells the share for $115, they’ve received a $20 return because they received $20 more than they paid.

You can also express returns as a percentage. This can make it easier to compare the returns of two different investments with a different share price. For example, an investment priced at $1,000 and produced a return of $500 compared to an investment priced at $100 and produced a $200 return. The $100 investment had a greater percentage return despite its lower return in dollars.

Some investors choose to reinvest their investment’s yield, for example, using dividends to purchase additional shares in the company that pays dividends.

Jane buys 500 shares in the fictional company Flowers and More for $30 each, meaning she pays a total of $15,000. She holds the shares for one year, receiving $.50 in dividends per share. She then sells the shares for $34.50 each.

After Jane sells the shares, she has received a total of $250 in dividends and $17,250 from the sale of the shares. In total, she received $17,500 from the investment. That means her total return, including both dividends and share appreciation is $2,500 or 16.67%.

John buys 200 shares in the fictional Widgets Inc for $60 per share. He collects $1 in dividends per share and sells the share for $54 each after one year.

When he completes the sale, John has received $200 in dividends payments and $10,800 from the sale of the shares. He originally spent $12,000 on the shares, so his total return is -$1,000 or -8.33%.

John might decide that instead of taking the dividends, he wants to reinvest them. After the first year, John receives $200 in dividends. He uses those to purchase additional shares in Widgets Inc at $54 per share. Instead of having 200 shares, he now has 203.70 shares. He then sells the shares for $55 each, making $11,203.50 from the sale.

His total return is

$11,203.5 + $12,000 = -$796.50

Total return matters because it gives a complete view of the return that an investment produces. Many securities provide value in multiple ways. For example, stocks can pay dividends and appreciate in value. Looking at just one form of return that a security gives doesn’t show the true value that the investment offers.

Viewing total return as a percentage also makes it easy to compare the performance of different investments, especially investments of different sizes.

For example, an investment that returns $5,000 on an initial investment of $10,000 produced a 50% return. An investment that returns $100,000 on a $1M principal value produced just a 10% return. The larger return provided more cash return, but a lower percentage total return.

Comparing total return per year (annualized total return) is also useful. If an investment that someone made 10 years ago produced a total return of 50%, it has produced less return per year than an investment made last year that produced 15% returns.

Total return is a measure of the total value that an investment has produced, whether it comes in the form of a change in value of the asset or income the asset produced. Yield measures only the income that an investment produces, which is just one component of total return.

Typically, yield is expressed as a percentage of the amount paid for the asset or the asset’s current worth. For example, a share worth $100 that produces $2 of dividends each year has a yield of 2%. Investors can also reinvest an investment’s yield to increase the potential return.

Total return is a measure of the value that an investment has produced since it was added to your portfolio. Today’s return only looks at the change in value for the current day, as compared to the closing price on the previous day.

Here's an example of total return. If an investor bought a share at $100 on January 1, and on July 1, the share's market price is $150, then their total return is $50.

Here's an example of today's return. If an investor owns a share with a market price of $150, and the closing price on the previous day was $145, then today's return is $5.

To calculate the total return on a stock, you can use the following formula.

(((Ending stock price - Starting stock price) + Dividends received) / Starting stock price) * 100

This formula will produce the percentage return for the stock.

Some investors choose to reinvest the dividend payments that they receive, using them to purchase additional shares. The formula to calculate total return with dividend reinvestment is:

(((Ending stock price * number of shares currently owned) - (starting stock price * number of shares initially purchased) + other cash distributions received) / (starting stock price * number of shares initially purchased)) * 100

This formula produces the percentage return.

To calculate the total return of a mutual fund, use the following formula.

((((Current net asset value - Starting net asset value) + Dividends and capital gain distributions received) / Starting price) * 100

This formula will produce the percentage return for the mutual fund.

To find the total return of a bond or other fixed income security, use this formula.

((Ending principal payment + Coupon interest + Compound interest - Amount paid) / Amount paid) * 100

Some bonds don’t offer compounding interest, instead paying the coupon directly to the bondholder. In that case, the total return formula is:

((Ending principal payment + Coupon interest - Amount paid) / Amount paid) * 100

This formula will produce the percentage return for the bond.

The general formula for total return is:

((((Initial price - starting price) + cash income) / starting price) * 100

How do you calculate total return in Excel?

To calculate the total return in Excel, put the number of shares you bought in cell A1, and the price paid in cell A2. In a cell A3, put the income received per share. Finally, in cell A4, put the current value of the shares.

Then, you can use this formula to find the total investment return.

=(((A4-A1) * A2)+A3)/A1

The total return index follows the performance of a set of stocks, assuming that the investor reinvests all dividends and other cash distributions into additional shares.

For example, if someone owns 100 shares of a fund that tracks the S&P 500 and receives dividends each year, instead of using those dividends for other purposes, the investor immediately uses those dividends to buy additional shares in the fund. This type of reinvestment can increase total returns by helping the growth compound.

Total return investing is a strategy that focuses on producing the highest possible total return, whether that return comes in the form of dividends, distributions, or increasing the value of the securities the investor owns.

It is a strategy commonly used by people who want to produce income from their investments. The investors take dividends and other distributions and use that income for other purposes, such as living expenses, selling shares to produce additional income as needed.

Many different mutual fund and exchange traded fund providers have total return funds. Some focus on specific market sectors and industries, indexes like the S&P 500 or Russell 2000, the total United States market, or hold a wide mixture of international stocks, bonds, and other securities.

There is no single answer as to which is best. Each investor should consider their investment objectives and do their due diligence to choose the right investing strategy for themselves. Remember that past performance doesn’t indicate what future results will be. All investing carries risk, including the risk of losing your initial investment.