Understanding Total Returns (Capital Growth and Income) and Why it’s Important
When you’re investing, creating wealth and on your journey to financial freedom one of the most important areas to understand is your total returns.
The total return provides a full picture of how your assets are really performing. Capital growth (the difference between what you purchased it for and the assets current value) only shows one part of your overall return. The interest or dividends form the other component known as the income component or passive income.
The total return factors in the price appreciation of the asset (or depreciation) PLUS the income generated.
It’s usually expressed as a percentage and calculated over a year.To calculate your capital growth or loss, start with your cost base. This is the original purchase price of the asset plus any brokerage costs you incurred. For example, if your cost base for a share is $20 and a year later it is worth $22, your capital gain is $2 or 10%. However, if it is worth $18, your capital loss is $2.
Now, if that share paid a fully franked dividend of 4.5% (the average for the S&P ASX 200) and is now worth $22, your dividend is $1, making your total return $23 and 15%.
Having earnings from income (dividends or interest) as well as capital growth allows you to re-invest those earnings when they’re received (usually quarterly, bi-annually or annually) compounding your returns.
For examples of ETF’s that have the potential to offer both capital growth and income.
This is general information and for educational purposes only.
