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Transcript: What is total return and why does it matter?

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Here's a great question I got recently from a reader:

"While researching some ETFs, I came across the term 'total returns.' Does that include dividends or not?"

Yes, it does. As the name suggests, the total return includes all sources of return - dividends, interest and capital gains. It's expressed as a percentage for a certain period, usually one year.

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Let's look at an example.

I used our Bloomberg terminal to pull up the total return analysis page for TransCanada Corp. As you can see at the top left, we're examining the one-year period from March 21, 2011, to March 21, 2012.

Now let's look down here at the section labelled "returns." The first one is "simple price appreciation." You can see that, over the one-year period, TransCanada's stock rose 8.86 per cent.

That's just the increase in the stock price alone. To get the total return, we need to include dividends.

If you look at the next line, it gives the return assuming you'd invested all of the dividends in more shares of TransCanada. So the total return in this case is 13.3 per cent.

Usually when you see a total return figure, it assumes you have reinvested dividends in more shares. Not everybody does this of course. Also, if you hold your stock or ETF in a non-registered account, you'll have to pay tax on the dividends. So keep those things in mind when you look at total return figures.

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