Calculating Total Return Including Dividends
You've often heard that 'the S&P 500's long-term annual return is about 10%,' right? But if you count only the rise in price, it's lower than that. What fills the rest is dividends.
Price return vs. total return
Price Return is the return that looks only at the rise in price. Total Return is the return that adds to this the dividends received, assumed to have been 'reinvested.'
For an asset that pays dividends, these two diverge. If you ignore dividends and look only at price, you underestimate the actual performance. In particular, if you diligently reinvest dividends, compounding kicks in as those dividends generate further dividends.
The share of dividends in long-term returns
The U.S. S&P 500's long-term average return of about 10% is on a 'total return' basis. The price return, reflecting only price, is roughly 6–7% per year, and the remaining roughly 3–4 percentage points come from dividends.
Over longer periods, the contribution of dividends stands out even more. According to various analyses, over long stretches since the mid-20th century, dividend reinvestment is thought to explain a substantial part of the S&P 500's total return (roughly the 40%-range up to more, depending on the data and period). Because the figure varies greatly by measurement period and method, it's safer to understand it as 'the share of dividends is by no means small' rather than pinning it to a single exact number.
The dividend contribution ratio varies greatly by measurement period and method. The range here is an approximation based on long-term historical data.
How to calculate on a total-return basis
If you calculate it directly, assume that at each dividend payment you bought more of the same asset with that dividend, increasing your share count over time. Then the effect of dividend reinvestment is reflected in the final valuation.
When looking at an index too, you have to look at the 'Total Return Index' rather than the 'price index' for dividends to be included. When comparing performance, mixing your own return (dividends included) with the benchmark (price index) creates an illusion, so you have to match them on the same basis.
よくある質問
Q. Is it total return only if I reinvest all the dividends rather than spending them?
The total return index assumes 'dividends are reinvested immediately.' In practice, if you spend dividends as cash, the compounding effect shrinks by that much, so the actual performance lands somewhere lower than the total return and higher than the price return.
Q. For a stock that pays no dividends, are the price return and total return the same?
Yes. A stock that pays no dividends has no dividend reinvestment effect, so the price return and total return are effectively the same. Instead, such companies often reinvest their profits and aim to reward you through share-price growth.
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