In my columns, I often refer to the total return of a stock, fund or an index. Today, in response to reader queries, I'll be exploring the concept of total return in more detail.
First, I'll provide a definition. Then I'll answer a few reader questions.
What is total return?
Total return is an investment's return from all sources – including capital appreciation, dividends and interest – over a given time period. It is often expressed as an annual percentage, and typically assumes that all dividends or other income were reinvested in additional shares or units.
For example, shares of Bank of Montreal rose about 41.6 per cent in the 12 months to Feb. 9. That's the price return alone. If you include dividends, the return jumps to about 46.5 per cent. And if you assume those dividends were reinvested – taking full advantage of compounding – BMO's total return rises to 47.3 per cent.
Is the total return my actual return?
Not necessarily. Most stock investors don't reinvest every penny of their dividends in additional shares – that usually requires enrolment in a dividend-reinvestment plan with the company's transfer agent – so total return is usually a theoretical measure. (Mutual funds, on the other hand, do make it easy to reinvest the entire distribution.) Total return is also before taxes on interest, dividends and capital gains. Those limitations aside, total return is a useful measure of performance and is a handy tool for comparing investments.
Where can I find total return data for securities?
ETF and mutual-fund companies publish total returns on their websites, but finding the data for stocks requires a bit more work. If you create a Watchlist of stocks on globeinvestor.com and choose the "dividends" view, you'll see the one-year and annualized five-year total returns. These figures include dividends, but do not assume they were reinvested. The website longrundata.com lets you pick a start and end date for a stock or ETF and calculate the total return over that period assuming dividends were reinvested.
How can I determine the total return for an index?
Stock indexes quoted in the financial media are only giving you part of the story because they are based on price alone and exclude dividends. But dividends – especially if reinvested – can have an enormous impact on your returns. For that reason, most major stock-market indexes also have a total return version that includes reinvested dividends.
Want to view a chart of the S&P/TSX composite total-return index? Go to globeinvestor.com and enter the symbol TSXT-I in the search box. If you click on "view large chart," you can choose a date range from one day to a decade or more. Moving your mouse over the chart will reveal specific index values at certain points in time so you can calculate percentage changes for various periods. (You can also find historical values for the S&P/TSX composite total-return index here.)
Here's another neat trick: If you want to graphically compare the performance of the S&P/TSX total-return index to the regular S&P/TSX composite index, after you've created your total-return chart, click on "compare" and under "view suggested," choose "S&P/TSX composite." Then, tick the box and click "done." If you examine the two indexes over a period of, say, five or 10 years, you'll see how the total-return chart gradually pulls ahead of the price-only chart. This is a great way to visualize the power of dividends and compounding.
You can find total return versions of the S&P 500, Dow Jones industrial average and other indexes with a Google search. Another shorthand way to calculate an index's total return for a specific period is to find an ETF that tracks the index and then calculate the ETF's total annual return using longrundata.com. You then need to adjust the ETF's annual return figure upward slightly by adding back the ETF's annual management-expense ratio. This is because ETFs have costs that affect their performance, whereas indexes don't.
For example, in 2016 the iShares Core S&P/TSX Capped Composite Index ETF (ticker XIC) posted a total return of 21.01 per cent (I got this number from longrundata.com and then verified it on the iShares website). If you add XIC's MER of 0.06 per cent, the total return rises to 21.07 per cent. This is very close to the S&P/TSX composite total-return index's actual return of 21.08 per cent in 2016.
I hope I haven't totally exhausted you with this discussion of total returns. Learning about this stuff is totally worth it, in my opinion.