How To

A more definitive way of gauging how your shares are really performing

Fri 29 Jul 22, 3:12pm (AEST)
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Key Points

  • Capital gains typically don't provide a complete picture of how your shares have generated returns
  • Total return typically refers to the return from all sources, including capital gains and the all-too often overlooked income from dividends - and/or or other distributions to you the shareholder – within a single metric

It’s tempting to judge your stock-picking success on the rise or fall of the stock price on any given day.

But it’s important to remember that capital gains – the difference between the purchase price and what the stock is worth now – isn’t a complete picture of how your shares have generated returns within your portfolio.

Ironically, while some investors are fixated exclusively on share price, another cohort - typically income-focused investors – can be singularly focused on income derived from myriad forms of corporate activity, and virtually ignore share-price movements.

Complete picture

A more complete way to gauge how a stock has performed over a specified time period is to take what’s called a total returns snapshot.

It’s not brain surgery, total return typically refers to the return from all sources, including capital gains and the all-too often overlooked income from dividends - and/or or other distributions to you the shareholder – within a single metric.

This more holistic measure is also useful when wanting to compare investment returns among dividend-paying stocks, and how they rate with their non-dividend-paying counterparts.

It can also help compare investment results when a stock has been in your portfolio for several years.

Every picture tells a story

Index

1 year return

YTD

Code

S&P/ASX Total Return Index

-2.79%

-5.52%

XJT

S&P/ASX 200 Index

-6.65%

-7.47%

XJO

S&P/ASX All Ords Index

-7.01%

-8.56%

XAO

Total returns: the workings

While calculating total returns isn’t hard, there are a number of steps to getting the number’s you’re looking for:

Capital gains: You paid $20 for a stock and it's now trading for $30, which means your capital gain is $10 per share.

Income: Next you need to add the dividends plus other distributions the stock has paid over your entire holding period.

By combining capital gains with income received you’ll be able to work out the total return as a dollar amount.

There are three steps to seeing the total return expressed as a percentage:

  • Take the dollar amount of total return you calculated

  • Divide by the price you paid for the investment

  • Multiply the result by 100

A classic example

You bought shares in Widgets Inc on Jan. 2, 2020, and sold them on Jan. 2, 2022, and you want to determine your total return on your investment.

Here are the detail you need:

  • You bought shares for $22.60.

  • Two years later, you sold those shares for $25.50.

  • Over the two-year holding period, Widgets paid eight quarterly dividends, which added up to $0.92.

The workings

Armed with the information above you can firstly calculate your total returns:

  • Capital gain on each share: $2.90 per share i.e $25.50 - $22.60.

  • Adding the $0.92 in dividends to your capital gain of $2.90 and your total return was $3.82 per share.

Now we need to work out what the total return is as a percentage

Divide the $3.82 total return by the purchase price [for each share] $22.60, and then multiply by 100.

This gives you a total return of 16.9% over two years.

Here are the steps to annualising the total return

  1. Take the percentage total return you found in the previous step (written as a decimal) and add 1.

  2. Then, raise this to the power of 1 divided by the number of years you held the investment.

  3. Then you need to subtract 1.

Confused? Here’s the total return formula for added guidance.

Annualised total return equals the total return plus one, raised to the power of 1 over the number of years, then subtracting 1.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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