The Difference Between Price Return and Total Return
The price return vs. total return of an investment can significantly alter the performance of a dividend-paying stock.
Key Takeaways
Price return and total return are two ways of measuring the performance of an investment over a certain period of time.
Price return measures the change in price of an investment over a period of time, and does not take into account any dividends or other distributions.
Total return measures the change in price of an investment over a period of time, as well as any dividends or other distributions that are reinvested into the investment.
Total return is generally considered to be a more accurate measure of an investment's performance, as it takes into account both price changes and the income generated by the investment.
Total return can be calculated using a simple formula that takes into account the initial investment, any subsequent investments, and the reinvestment of any dividends or other distributions.
Price return may be more useful for investors who are primarily interested in short-term price changes and do not rely on income generated by the investment, while total return is more useful for long-term investors who are interested in both price changes and income generated by the investment.
Price Return vs. Total Return | What is the Difference
The total return is a measure of an investment's performance that considers both the change in price and any income (such as dividends or interest) generated by the investment. It represents an investment's overall gain or loss over a certain period.
Price return, also known as capital return, is a measure of the performance of an investment that only takes into account the change in the price of the investment. It represents the change in the value of the investment due to price movement but does not include any income that the investment generates.
In other words, the total return includes price return and income return, while price return only reflects the investment price change.
Total Return Meaning
The total return measures the performance of an investment that takes into account the change in the price of the investment and any income (such as dividends or interest) the investment generates. It represents an investment's overall gain or loss over a certain period.
In other words, total return is a measure of the profitability of an investment, taking into account both the appreciation or depreciation of the investment and any additional income generated by the investment.
This can be calculated by adding any income generated by the investment (such as dividends or interest) to the change in the investment price and then expressing the result as a percentage of the original investment.
For example, if you bought a stock for $100 and it increased in price to $110 and paid $2 in dividends over the period, your total return would be (10+2)/100 = 12%.
It's important to note that total return is a way to measure how an investment has performed over a certain period of time and can be used to compare the performance of different investments.
Total Return Indexes Explained
Total return indexes are a type of financial index that measures the performance of a group of securities, such as a stock market index or a bond market index, by taking into account both the change in the price of the securities and any income generated by the securities.
These indexes are used to track the performance of a particular market or sector and are often used as a benchmark for investment performance.
Total return indexes differ from price-return indexes like the S&P 500, which only track the price changes of the securities in the index and don't include the income generated by them.
What is Price Return?
Price return refers to the percentage change in the price of a stock over a specific period of time.
It represents the gain or loss that an investor experiences based solely on changes in the stock's price, without considering other factors such as dividends, stock splits, or any other corporate actions.
S&P 500 Price Return vs. Total Return
While dividends may seem small in the short term, they make a massive difference in the total return over long periods.
The chart above shows the performance of the S&P 500 with and without the dividend income reinvested.
Clearly, dividends are a significant money-maker in a long-term investment portfolio.
Dividend Reinvestment Plans (DRIP) Portfolios
DRIP stands for "Dividend Reinvestment Plan," which is a program offered by some companies that allow shareholders to automatically reinvest their dividends into additional shares of the company's stock instead of receiving the dividends in cash.
When using DRIP in an investment portfolio, the dividends generated by the stocks in the portfolio are automatically reinvested into additional shares of the stock. This has the effect of increasing the number of shares that the investor owns, which can lead to higher returns over time.
When it comes to total return vs. price return, using DRIP can increase the total return of an investment, as it considers both the change in the price of the investment and any income generated by the investment.
As mentioned earlier, total return is the overall gain or loss of an investment over a certain period, while price return only reflects the change in the investment's price. By reinvesting dividends, the total return of the investment will be higher than if you received the dividends in cash.
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