What is Real Total Return?


In the last 6 months (May to November 2021) the Dow has gone from 34,756 points to 33,290, then up to 35,625 and then dropping to 33,843. What does this all mean? Stock markets are cyclical and it's impossible to accurately predict which way the stock market will go.

Markets are cyclical
This fluctuation is normal, many believe that the market is still high, and further declines are coming. I’m not going to make any predictions, in fact no one can accurately predict where stock prices will go. Regardless of market conditions the key here is to focus on your long-term Real Total Return:

Real Total Return = Capital Appreciation + Dividend Income + Dividend Growth

Real Total Return is capital appreciation, dividend income and dividend growth. The only securities that allow for Real Total Return are common dividend paying stocks.

Dividend Growth
Dividend growth provides you with higher returns. Your Dividend Yield on Cost goes up every time the dividend goes up. Suppose you purchased PG in 2000 for $23.38, the dividend at the time was $0.64. With annual increases here would be your yield on cost over time:

Year Stock Purchase Price Dividend Yield on Cost
2000 $23.38 $0.640 $0.640 / $23.38 = 2.74%
2005 $23.38 $1.030 $1.030 / $23.38 = 4.41%
2010 $23.38 $1.802 $1.802 / $23.38 = 7.71%
2015 $23.38 $2.594 $2.594 / $23.38 = 11.10%
2021 $23.38 $3.480 $3.480 / $23.38 = 14.88%

There you have it, double digit returns from just holding on to a quality stock and collecting the rising dividends. This my friends, is our investing mantra.

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Richard Stuart

Kanwal, would you be so kind as to expand upon Real Total Return when you have a dividend reinvestment plan in place.

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Kanwal Sarai

Hi Richard,

Real Total Return = Capital Appreciation + Dividend Income + Dividend Growth 

Therefore, even with a DRIP (dividend reinvestment plan) in the long-term you will be taking advantage of dividend growth. Dividend income will not come to you as cash but in the form of additional shares that will continue to pay dividends (in your case will provide you with more shares).

It's difficult to apply values to the formula when it comes to DRIPs. I suppose you could calculate the current market value of your holdings and compare it to your initial amount invested, in order to calculate your return.

Personally I don't do DRIPs, and I've written about it here in a previous blog article: https://www.simplyinvesting.com/blog/32579-are-dividend-re-investment-plans-worth


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