Assessing Total Return
Total return calculates how much the value of an investment has changed over a particular period, expressed as a percentage gain or loss. It also compares the selling value with the purchase price, and takes account of capital gains, dividends, and appreciation or depreciation.
Every investor wants to know now much they've really gained (or lost) from an investment. Total return gives them the most accurate picture, because it includes all the relevant factors—not just current value.
Each of these factors also provides significant information on its own. For example, investors looking for income will pay particular attention to dividends. Those investing for long-term growth will scrutinize how their capital has appreciated.
Understanding how total return is influenced by each factor helps investors to judge whether a security is tax-efficient, if it can be relied on for a steady income, and how volatile it is.
Total return reveals how an investment performs by including information about income from dividends, capital gains and capital appreciation—and the change (up or down) in its net asset value (NAV). The formula for the calculation is:
Example:
Suppose a security has an initial NAV of $90. After a year, this has increased by $8 to $98. Investors receive a dividend of $4 per share and a capital gains distribution of $5. Total return for the security is calculated like this:
- Total return is usually calculated on an annual basis, and makes the assumption that dividends are re-invested in the same stock.
- When capital gains are greater than capital losses, investors receive most of the net gain in the form of a capital gains distribution.
- Total return does not predict how an investment will behave in the future—it's an assessment of performance so far.
- The calculation does not usually include charges paid at the time of purchase, or taxes due on income from the investment.
- The U.S. Securities & Exchange Commission requires companies to compare total return on its common stock with total return on (a) a general market index, and (b) a relevant industry or group index. This information must be available for the last five tax years.
- Once investors have established their overall investment aims, and the level of risk they are prepared to tolerate, total return is a useful additional measure to help them choose specific securities.
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