# What Is Total Return and Why Does It Matter?

Total return means just what is implies – it’s the total income gained from an investment, including capital gains, over a specified period of time. Mainly, that time frame is one year worth of investment activity.

Investment analysts rely on total return to give them a broad picture of asset performance over a long period of time.

For example, the Quarterly Journal of Economics’ “The Rate of Return on Everything: 1870-2015” tracked the total return of a basket of investment assets, including stocks, bonds, funds and real estate in 16 countries.

Their verdict? Stocks and real estate fared best under the total return investment analysis model, with dividends the driving force behind stock performance and housing investments providing more stability.

## Why Total Return Matters

Total return, also known as annualized return, matters to investors in a big way? Why?

Because the calculus allows you to accurately and efficiently track 100% of your investment’s performance.

Take a stock investment, for example. Share price alone doesn’t give you a complete picture of how that stock is performing. By adding key metrics like dividends, distributions, and capital gains to the mix, you’re getting a more comprehensive picture of your stock investment’s value.

Once you have your stock’s total return, you now have a good metric to weigh your investment’s performance against other assets in the same category, and use that comparison to make better investment decisions.

How is total return defined, how is it calculated and what impact does it have on your investments over time?

Let’s take a deeper look into total return and see what it means for your investment portfolio’s performance over time and why it’s such an important gauge for investors on a long-term basis.

## How Does Total Return Work?

In Wall Street lingo, total return is the rate of investment return on a single asset (like a stock) or a pool of assets (like a mutual fund) over a specific timetable.

Total return has multiple components that, calculated and added together, comprise an in vestment’s total return:

**Interest.** This is the percentage of a loan or deposit that must be paid back to the lender or account holder. For investors, interest is most commonly present in bond investments, some real estate funds, and in bank deposits.

**Capital gains**. A capital gain is the profit earned from owning an asset, like a stock, fund, a piece of real estate, or a collectible item like jewelry or art. For taxable purposes, short-term capital gains represent profits earned from asset sales that were held by the owner for one year or less. Long-term capital gains are profits earned on the ownership of assets for one year or more.

**Dividends**. A dividend represents the shareholder’s portion on the underlying company’s profits. A company can return that profit to an investor through a dividend payment that’s usually paid in cash. Dividend payments are a favorite source of asset income for a wide range of investors, including retirees, income-oriented investors, and many mutual fund and exchange-traded fund owners.

**Distributions.** An investment distribution usually comes from a fund, a bank or investment account, or from a single stock issue. A distribution represents a payment of interest, principal or dividend by the investment issuer.

## TheStreet Recommends

Structurally, total return is derived from two primary classes of investment returns:

**Income. **This includes interest paid out from bonds and deposit accounts, along with distribution and dividend payments.

**Cost basis**. This is the market price of an asset, like a stock or a fund, that changes over time.

With the above components in place, total return becomes the financial value, expressed as a percentage, of an asset investment over time (again, usually that means one year.)

For example, a total return on an investment of 15% simply means that asset has increased in value by 15% since it was purchased by the owner. That 15% of asset value gained can be expressed in numerous ways, including value growth from dividend distributions, interest paid out, capital gain earned, or asset distribution.

Or, take a simple stock investment. A stock that pays out a 3% dividend yield against its purchase price, but which also has gained 7% in value over a one-year time frame generates a total return of 10% to the shareholder.

## Total Return Formula

Determining your investment’s total return really isn’t all that complicated. Here’s a step-by-step process of calculating your own asset’s total return:

### 1. Figure Out the Cost of Your Investment

Use the original price you paid for your investment asset. For example, let’s say you bought 100 shares of ABC stock at $10 per share – or $1,000.

Figure out the present value of your investment. To get to the total return on an investment, you’ll need to calculate its current price. In the above example, your ABC stock investment has returned 20%, and now stands at $1,200.

### 2. Add in Any Other Income Earned From Your Investment

As noted above, capital gains, dividends, interest, and distributions can add to the total value of your stock. If ABC stock paid you a 1% cash dividend on each share of stock owed, you’ve just added $100 to your total return ($100 times $1 equals $100.)

### 3. Figure Out Asset Earnings Over a 1-Year Timetable

Here, simply add your investment price to the extra income generated by your asset. In the case of ABC stock, your calculation is as follows: $1,200 minus $1,000 (the original price of the stock) plus $100 (your 1% dividend) equals $300.

### 4. Divide Your Annual Investment Returns by the Price You Paid for the Investment

With your $1,000 purchase of ABC stock and your $300 total return to date, the calculation is as follows: $300 divided by $1,000 equals .3 or 30%.

Now you have the total return of your investment, both in terms of dollar value and in total return percentage.

## The Takeaway on Total Return

Basically, total return means taking not just the appreciation of your asset investment into account, but also adding other asset value-generators like capital gains interest and dividends into account.

Once you factor in total return, you have a complete view of your investment’s actual value, making it easier to build a comprehensive investment portfolio that balances capital appreciation with income-generating investments.

That can give an investor a “best of both worlds” portfolio, with a good balance of yield and total return over the long haul.