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. As you will learn in this article, there’s more to stocks than just increasing or decreasing prices. So let’s get to it, what is the difference between price return and 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.
Focusing on the right thing
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.
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 prices 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.
I hope now that you’ve learned the difference between price return and total return. Now maybe it’s time to learn how to think like an investor?