Many investors care about price return when they compare how they are performing against others or against a selected index. For us dividend investors, we shouldn’t care that much about price return. No, we should care about total return.
Price Return is the difference between the current price of the stock, and the price you paid for the stock. It can either be negative, zero or positive.
Total Return is Price Return + Dividend Return. It is the difference between the current price of the stock, and the price you paid for the stock, BUT ALSO dividend received. Often, you will see a difference in price return and total return. It might go from negative to positive, just because you consider the dividend.
You might say, so what? Well dear reader, the reason you should focus on Total Return and not Price return is this:
- You can´t control the everyday prices of a stock. A hedge fund can short a stock, Trump can tweet about something, the sector can fall and so on. A lot of stuff can happen that changes the price of the stock, and these things happen every day. If you focus too much about the changes, you will start to focus on noise. Yes, noise. Noise is the thing you read in newspapers, on forums. It´s distractive, and if you focus too much on it, it will force you to make mistakes.
- Once you have paid the price you paid for the stock, the only thing that´s interesting from here is how the company performs from this point. No, I´m not talking about how the company´s stock is performing, but how the company, it´s divisions, it´s profit, it´s management and cash flow. Yes, everything that makes a company. This is what you have paid for.
- Far too many investors see stocks as merely stocks. The digital age sucks in that perspective. Too few humans have a solid understanding of digits, binary numbers so they think that the numbers on the screen don´t matter. How often doesn´t it happens that young investors buy a stock for 5000 $ without knowing what they bought? Often. How often does it happen that a young man goes to a store, literally any store, and just buys something for 5000$ solely for excitement? Not so often. Start implanting the idea fast that owning a stock is also the same as owning a small part of a business
- When we reach a crash, you will see all prices go down. This is good if you receive dividends. By focusing on total return, you will think of low price as a nice way of increases your total return by buying when the market is low. In that way, you stop caring too much about prices. It´s the total return that concern you, not noise.
Last week I had some spear time, so I created a tiny portfolio tracker. Just to see the difference between price return and total return. I guess it´s okay to use once, but for most of us, it´s useless, since we most likely are going to buy more stocks in our companies. But hey, use it for inspiration. The most important thing is that you notice that even though the current price of some stocks are lower than my buying price, my total return is positive due to the dividends that I have received. See? Don´t let price fool you
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