# What Is Total Return? Definition, Formula, and Examples

![Total Return: The return an investment produces in all forms, including capital gains, dividends, and interest.](https://www.investopedia.com/thmb/rgt2gNWubbQHFW2VjB-t19seKAY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Totalreturn_final-d835e9459d3844d6bf869a29ec45422b.png)

*— Investopedia / Michela Buttignol*

## What Is Total Return?

Total return measures an investment's performance by considering interest, [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp), dividends, and [distributions](https://www.investopedia.com/terms/d/distribution.asp) over a set period. It offers a comprehensive view of an asset's growth by accounting for income from fixed-income investments and market price changes, providing investors with a powerful tool for evaluating financial success. This article will explain the significance of total return, outline its calculation, and provide examples to demonstrate its importance in strategic investment planning.

### Key Takeaways:

*   Total return measures an investment's actual performance, including interest, capital gains, dividends, and distributions over a period.
*   Expressed as a percentage, total return provides a comprehensive view of an investment’s growth by incorporating both income and capital appreciation.
*   Calculating total return helps investors assess true investment growth and make informed financial decisions regarding future planning.
*   Total return is crucial when analyzing a company's historical performance and in setting realistic expectations for future investments.
*   Average annual total returns, often compared to benchmarks, offer insights into mutual fund performance by reflecting reinvestment outcomes and sales charges.

## How to Interpret Total Return for Investments

Total return is the amount of [value an investor earns](https://www.investopedia.com/ask/answers/071415/what-formula-calculating-return-investment-roi-excel.asp) from a security over a specific period, typically one year when all distributions are reinvested. The total return is expressed as a percentage of the amount invested. For example, a 20% total return means the investment's value rose by 20% from its original price due to price increases, dividends, interest, or capital gains. It is a strong measure of an investment’s overall performance.

### Why Total Return Matters in Investment Analysis

Some top dividend stocks grow slowly and have small capital gains. Focusing solely on capital gains ignores other ways the stock’s value can increase, like price hikes. For example, an investor buys shares of Company B, and the share price increases 24.5% in one year. The investor gains 24.5% from the [price change](https://www.investopedia.com/terms/p/price-change.asp) alone. Company B's dividends add a 4.1% [yield](https://www.investopedia.com/terms/y/yield.asp), making the total return, including price changes, 28.6%.

The investor may wish to calculate [dividend-adjusted return](https://www.investopedia.com/terms/d/dividendadjustedreturn.asp). This figure considers both the stock price appreciation and its dividends. The dividend-adjusted return provides a more accurate valuation of a stock's return.

Total return shows an investment's real growth over time. It’s crucial to look at the overall picture, not just one return type.

Total return is used when analyzing a company’s historical performance. Calculating expected future returns puts reasonable expectations on an investor’s investments and helps plan for retirement or other needs.

### Evaluating Investments: Average Annual Total Returns Explained 

When analyzing [mutual fund](https://www.investopedia.com/terms/m/mutualfund.asp) performance, investors should analyze their average annual total returns for different periods. Comparing returns to a [benchmark](https://www.investopedia.com/terms/b/benchmark.asp) indicates how the fund has performed, relative to an index. When analyzing average annual total returns, it's important to remember:

*   The numbers almost always reflect the reinvestment of dividends and capital gains distributions.
*   Effects of sales charges may or may not be included. However, this information is disclosed with return numbers.

## Real-Life Application: Calculating Total Return

An investor buys 100 shares of Stock A at $20 per share for an initial value of $2,000. Stock A pays a 5% dividend the investor reinvests, buying five additional shares. After one year, the [share price](https://www.investopedia.com/ask/answers/061615/how-companys-share-price-determined.asp) rises to $22.

To calculate the investment's [total return](https://www.investopedia.com/articles/investing/121015/yield-vs-total-return-how-they-differ-and-how-use-them.asp), the investor divides the total investment gains (105 shares x $22 per share = $2,310 current value - $2,000 initial value = $310 total gains) by the initial value of the investment ($2,000) and multiplies by 100 to convert the answer to a percentage ($310 / $2,000 x 100 = 15.5%). The investor's total return is 15.5%.

## The Bottom Line

Total return is a comprehensive measure of an investment's performance, encompassing interest, dividends, capital gains, and distributions over a specified period. It provides a clearer picture of an investment's total growth compared to relying solely on capital gains. Understanding total return is crucial for evaluating the true growth of your investments, planning for future financial goals, and ensuring a well-rounded investment strategy. By comparing average annual total returns and considering benchmarks, investors can gain insights into the relative performance of mutual funds and other investment vehicles.