Total stock return is the overall return from all sources like capital gains, dividends and any other distributions to the shareholder over a given evaluation period, typically one year. Total return is a strong measure of an investment’s overall performance. In general the two main sources of income from a stock are the dividends received and the stock appreciation in value for the period. This means that in most cases the total stock return will be the appreciation in the price plus any dividends paid, divided by the original price paid for the stock. The appreciation of the stock is calculated when we subtract from the current price of the stock, the price of the stock in the begin of the evaluation period. The dividends (if any) received is a sum of all dividends received for the period. For example, a stock that paid a 5% dividend yield relative to its purchase price in a year since purchase, and which also increased in value by 5% over the same period, would have produced a total return of 10% over the one-year time period. Total returns can be calculated as a dollar amount, or as a percentage. In other words, you can say that a stock’s total return was $10 per share for the period, or you could say that its total return was 7%.
The formula for calculating the total stock return is:
Total Stock Return = ((P1-P0)+D)/P0
Where P0 is the starting price of the stock, P1 is the price of the stock at the end of the period and D is the total dividends amount received for the period. The above formula will give us the return as a percentage value. If we want to calculate the total stock return as dollar amount we can do it by not dividing the return by the initial stock price. The formula will be as follows:
Total Stock Return = (P1-P0)+D
For example, if we have originally paid $200 for a single share of a particular company and the stock has paid dividends of $5 (for the holding period) and we have sold the stock at a price of $205. The total stock return would be $10 which equals $205 minus $200, then plus $5. If we would like to calculate the total stock return in percentage we can just divide the total stock return in dollar value with the initial price of the stock. In our example above the total stock return will we $10/$200 or 5%.
Total return can also be expressed on the whole holding period, or over specified time intervals. If you hold a stock for several years, it might be useful to know its over all total return during your holding period. Alternatively, knowing your total return on an annualised basis could help compare the results of that investment with others you own, or with the stock market as a whole.
Total stock return is the ultimate measure of how well an investment is actually performing. There are many reasons why you might want to calculate the total return of a stock. The most obvious one is to be able to figure out how well a specific stock investment is performing for a given period of time. Also by knowing your total stock return you can compare it with your other investments as well as with the over all stock market performance. This gives you a benchmark top see how well is a particular investment doing compared with other investments in your portfolio as well as compared with the stock market.
Since most of the stocks add value to an investor portfolio in a combination of ways, mainly in the form of dividends and capital gains, total stock return allows us to combine the different types of return into a single measurement. In general, some of the best and most reliable dividend stocks have small growth potential and conversely some of the stocks with the most growth potential don’t pay dividends at all. The total stock return provides a tool to determine and compare the performance of different stocks in an absolute way.
Obviously the higher your stock return is the better you are doing as an investor. What determent if a stock return is good is depending on a multiple factors like what your risk tolerance is, what are your investment goals and what is your time horizon. Another way of measuring your stock return numbers is by using the return of the stock market as a benchmark. If your total stock return is better than the stock market performance for the same period of time it means that your stock investment is doing better than average.