Total return measures the complete gain or loss on an investment over a given period. Unlike price return, total return includes both capital appreciation and income received, such as dividends or interest payments.
Why total return matters
Many investors focus solely on share price movements. This approach ignores a significant component of equity returns. Historically, dividends have accounted for roughly 30 to 50 percent of total stock market returns in developed markets. Ignoring dividends distorts performance comparisons and leads to poor decision-making.
The total return formula
Total Return = (Ending Value - Beginning Value + Dividends) / Beginning Value x 100
Where:
- Ending Value is the current or sale price of the investment
- Beginning Value is the original purchase price
- Dividends is the sum of all dividend payments received during the holding period
Worked example
Suppose you purchased 100 shares of a company at $50 per share. After two years, the share price is $58 and you received total dividends of $4 per share over the period.
| Component | Per share | Total (100 shares) |
|---|---|---|
| Purchase price | $50.00 | $5,000 |
| Sale price | $58.00 | $5,800 |
| Capital gain | $8.00 | $800 |
| Dividends received | $4.00 | $400 |
| Total gain | $12.00 | $1,200 |
Total return = ($58 - $50 + $4) / $50 x 100 = 24%
Price return = ($58 - $50) / $50 x 100 = 16%
The difference of 8 percentage points is entirely attributable to dividends. Over longer holding periods, this gap compounds significantly.
Total return vs price return
| Metric | Includes dividends | Best use case |
|---|---|---|
| Price return | No | Short-term trading analysis |
| Total return | Yes | Long-term investment evaluation |
Price return is misleading for dividend-paying stocks. A utility stock with a 5% dividend yield and flat price has a 0% price return but a 5% total return. Comparing it against a growth stock using price return alone would be unfair.
Annualised total return
For investments held longer than one year, annualising makes returns comparable across different time periods.
Annualised Return = ((1 + Total Return) ^ (1 / Years)) - 1
Using the earlier example with a 24% total return over 2 years:
Annualised return = ((1.24) ^ (1/2)) - 1 = 11.36% per year
Reinvested dividends and compounding
Total return becomes even more powerful when dividends are reinvested. Each dividend payment buys additional shares, which then generate their own dividends. Over decades, reinvested dividends can double or triple the final portfolio value compared to taking dividends as cash.
Adjusting for fees and taxes
The total return formula above gives a gross figure. To calculate net total return, subtract:
- Brokerage commissions on buy and sell transactions
- Dividend withholding tax (15 to 30 percent for non-resident investors)
- Capital gains tax on realised profits
Net total return gives a more realistic picture of actual investment performance.