What Does Total Returns Mean in the Stock Market?
A return in the stock market is the yield or profit that an investor earns from a security. According to USA Today, the total return is an even more precise calculation of gains and includes accumulations in an individual stock's price combined with the stock's dividend payouts for a given period of time. Of course, not every stock rises in price so the total return, including dividends, might reflect a loss rather than a gain.
Other People Are Reading
-
Dividends
-
Dividends are cash or stock distributions paid by a company as an incentive for investors to purchase an individual stock. These payouts are distributed on a given schedule, often on a quarterly or annual basis, determined by a company's board of directors. The board also decides any increases or reductions in the dividend amount per share, usually related to recent results for company profit as well as the company's financial outlook. Some investors rely on dividend payouts as a source of income while others reinvest the dividend in a company's shares.
Considerations
-
Total returns are typically measured in one-year increments. While the calculation is considered a true representation of a stock's value, the method assumes that all dividend payments have been reinvested in the company's shares, thus adding to the number of shares over time, rather than received as income payments without reinvestment. A total return does not take into account any state or federal taxes paid by investors on distributions.
-
Calculating Total Return
-
Calculating total return on a stock is a five-step process. 1. Determine the value of a security at the end of the period being measured, usually a one-year time frame. 2. Add the total amount of dividends paid in the period and combine the two figures together. 3. Take the value of the stock at the beginning of the period and subtract it from the sum of step two. 4. Divide the sum of step three by the result of step two. 5. Multiply the result of step four by 100 and the result is the total percentage return.
History
-
Reinvesting dividends can lead to substantially higher returns in the stock market than otherwise would have been earned. For an 80-year period ending in 2005, dividends accounted for 44 percent of total returns in the S&P 500, one of the basic measures of stock-market performance.
Measuring the Market
-
The Wilshire 5000 index is a comprehensive market index for U.S. stocks, according to Motley Fool, a market analysis firm. It is the largest index reflecting U.S. market value and is the most accurate measurement for total stock market returns, measuring almost all returns for stocks on major U.S. exchanges. Motley Fool and many other web-based financial sites provide dividend yields for most stocks in the Wilshire index as well as securities and mutual funds listed on other stock exchanges around the world.
-
