Many investors care about price return when they compare how they are performing against others or against a selected index. For dividend investors like us, 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.
Why Focus on Total Return
- 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 on these changes, you will eventually 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. If the company increases its profitability and free cash flow, you will at one point be rewarded once the market starts to price the stock accordingly.
- Far too many investors see stocks as mere stocks. The digital age sucks in that perspective. People often think that the numbers on the screen don’t matter and don’t see anything wrong with using 5 minutes to decide if they should put $10,000 in a company they know nothing about. Compare this to how much time you spend when trying to decide on a computer or a new phone.
- When we reach a crash, you will see all stock 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 increasing 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 concerns you, not noise.
Last week I had some spare 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 is lower than my buying price, my total return is positive due to the dividends that I have received. See? Don´t let the price fool you.
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Take a peek at my Dividend Income to learn more.