Shares – Price returns vs Total returns

When looking at the stock market it is likely we are looking at the change in the broad price indices, probably the ‘All Ordinaries’ price index or the ‘S&P/ASX 200’ price index.

It is important to understand that these indices measure only price change. That means that they are measuring only the capital gain or loss over a given period.

However, there is another method of measuring the returns of a particular index called the “total return”. Total return is the net sum of dividends and capital growth or decline over a period of time and frequently for a total portfolio of stocks.

For investors, the best measure that we have of total return is known as the accumulation index. It is also appropriately called the total return index.

Put another way, if you hold shares in a company the price return on those shares is the difference in the share price at the start and the end of a certain period.  The total return is a combination of the price difference and the dividends received along the way.

As an example, the price return of the ASX All Ordinaries Index over the past 10 years has been 4.18% per annum compared to the total return of 8.58% per annum. To put this into perspective, the amount of $10,000 invested 10 years ago would now be worth $15,061 on a price basis.  On a total return basis it would be $22,777.

So it can be argued the total return is a more realistic method of measuring the performance of a share portfolio, and a very compelling case for reinvesting dividends in company shares an investor holds.