Work out an equity's price return and its total return
The idea
Price return measures only the change in price: (P1 - P0) / P0. Total return adds income received, usually dividends: (P1 - P0 + D) / P0, so it equals price return plus dividend yield on the starting price. Over several periods the returns are linked by compounding, multiplying (1 + r) for each period and subtracting one, not by adding them, and an annualised figure is the geometric mean of those period returns. Corporate actions must be adjusted for: after a split the investor holds more shares, so ending price and dividends are measured per original share. Price indexes report price return only, which is why a total return index of the same stocks grows faster over time.
Formulas
Price return and total return
R_p = (P₁ − P₀) ÷ P₀ and R_t = (P₁ − P₀ + D) ÷ P₀
- R_p
- the price return
- R_t
- the total return
- P₀
- the price at the start
- P₁
- the price at the end
- D
- the dividends received in the period
Total return adds the cash received. Adjust prices for splits first.
Linking periods and annualising
R = (1 + r₁)(1 + r₂)… − 1 and R_a = (1 + R)^(1 ÷ n) − 1
- R
- the return over the whole holding
- r₁
- the return in period 1
- r₂
- the return in period 2
- R_a
- the annualised return
- n
- the number of years
Link returns by multiplying; never add them.
A practice question
A share bought at 40 is worth 37 a year later and paid a dividend of 0.80. The price return is:
- -5.5%Why not: Adding the dividend, which gives the total return. Price return counts only the change in price.
- -7.5% - correct
- -8.1%Why not: Dividing the 3 fall by the ending price of 37 instead of the starting price of 40.
Price return = (37 - 40) / 40 = -7.5%. Including the dividend, total return would be (37 - 40 + 0.80) / 40 = -5.5%.
A harder one
A share bought at 25 was worth 28 after one year, having paid 0.50 in dividends, and 26 after two years, having paid 0.60 in the second year. The two-year total return, compounding the annual returns, is closest to:
- 9.0%Why not: Adding the annual returns of 14% and -5% instead of compounding them.
- 4.0%Why not: The two-year price return, 26 / 25 - 1, which leaves out both dividends.
- 8.3% - correct
Year 1: (28 - 25 + 0.50) / 25 = 14%. Year 2: (26 - 28 + 0.60) / 28 = -5%. Two-year total return = 1.14 x 0.95 - 1 = 8.3%.
The hardest tier
An investor buys one share at 90. The company later splits 2-for-1, then pays a dividend of 0.40 per post-split share. At year end the share price is 48. The investor's total return is closest to:
- -46.2%Why not: Comparing the post-split price and one dividend with the pre-split cost, ignoring that the investor now holds two shares.
- 7.1%Why not: Adjusting the price for the split but counting the dividend on only one share instead of two.
- 7.6% - correct
After the split the investor holds 2 shares. Ending value = 2 x 48 + 2 x 0.40 = 96.80. Total return = 96.80 / 90 - 1 = 7.6%.
In the app: 9 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →