For many investors, tracking stock price changes is an important part of managing investments. However, tracking stock changes over time does not always give a true reflection of the total stock return. The total return takes into account both the capital gains and the dividends so that investors can get a better picture of how well the investment is doing. This can be useful when comparing stocks that have been held for different periods of time, as well as, comparing dividend-paying stocks to stocks without any dividends. By comparing like-for-like, you can see which investments are proving the most worthwhile.
A total stock return can be calculated as a monetary amount such as dollars, or as a percentage, both of which can be useful. If you have held a stock for over a year, you may wish to calculate the total return during the period you have held your stocks or to work it out on the return on a yearly basis. If investors are just concentrating on the short-term changes to stock prices, they often fail to accurately calculate the overall investment value. For investors more interested in the income generated from investments, they may fail to get an accurate picture of share-price movements.
The Method of Calculating Total Return
I am going to take you through some simple ways you can calculate your total stock return. Firstly, you need to work out how much capital gains your stock has produced since you bought it. So if you paid $100 for a stock and it is now trading at $125, your capital gain is $25 per share.
d up the dividends and other distributions that have been paid out over the time you have held the stocks. Then add your capital gains and your dividends for the period you have held the investments together to get the total return as a monetary amount, such as dollars.
If you would like to work out your total return as a percentage, take the total return amount you have just worked out in dollars, divide it by the price you paid for the investment and multiply it by 100. This will give you the total stock return over the period of your stocks over the holding period as a percentage.
Now if you would prefer to see how this works out over a yearly period, you will need to take the percentage you have just worked out and written it as a decimal, and plus 1. Then raise this to the power of 1 divided by the number of years you have held the stocks. Then subtract 1.
This formula assumes annual compounding, the most common method for calculating total returns but other intervals of compounding are possible.
What About if You are Reinvesting your Total Dividends?
The calculation above is based on stocks where you are not reinvesting any dividends you have received during your investment period. However, to maximize total returns for investment, dividend re-investment is often recommended as it not only affects your own investments but can grow a smaller company into a bigger one. So, when you receive dividends from your stocks you can use those dividend payments to buy additional shares of the same stock.
However, if you are reinvesting your dividends then each of the reinvestments becomes its own return calculation, which includes the capital gains from the newly purchased shares. A way to simplify the total return calculation for instances of investments with reinvested dividends is to take the overall value rather than the value per share.
Looking to the Future
I have discussed the benefits of calculating total return on your investments in order to be able to better compare your investments and get a better idea of which are performing the best. Another thing to consider is that with your total return calculation you are then able to make estimates on your future total return on how the stock may perform based on the investment’s past performance. That is not to say that the next year’s performance of a stock will perform in the exact same way as in previous years but it can be a useful tool to get an idea of the potential a stock has for future investment.
The stock market fluctuates constantly and returns can, therefore, vary from year to year. For many, it is a long-term game requiring patience, buying and holding stocks over long periods of time and reinvesting your back into the stocks.
For seasoned investors with multiple stocks, it is useful to see which are performing the best on a like-for-like basis, particularly as some may be more geared towards capital appreciation and others to produce income. Calculating total return on your stocks can be a useful way to get a better, bigger picture of how your stocks are performing.