Total Return Calculation and Dividends

[marko]

I should know the answer to this but either I’m getting forgetful or something.

“Numbers is hard for me” so bear with me here.

I think I understand how total return includes dividends and cap gains.

I understand how dividends and cap gains reduce the price of a fund in equal measure. Two percent of dividends reduce the fund’s price by two percent. Net zero.

What I’m struggling with is, if a fund had absolutely zero growth for a year and only had dividends and cap gains, wouldn’t the total return be zero as, while you would have more shares, your fund’s total value would not change? I don't see how a 2% dividend could be considered a 'return' if your NW on that fund didn't change.

If so, a fund’s reported total return (divs and CGs included) would essentially be only organic growth. I’m trying to understand how a fund that reported a 7% total return in 2017 had a 4% div and CG included in that. Was only 3% (7 minus 4) organic or was the 7% organic as the 4% only delivered a net zero return?

Any insight from our gurus appreciated. Thanks in advance!

 

[OldShooter]

Assuming you don't buy or sell any shares during the year, figure it this way:

How much money did you have at the beginning of the year, IOW the market value of your shares?

How much money did you have at the end of the year, IOW the market value of your shares PLUS the interest and dividends you received?

Divide year-end money by year-beginning money. If the number is greater than one you are ahead. Less? You are behind. Subtract one from the number, multiply the remainder by 100 and you have your percentage gain or loss.

(Note to nit-pickers, this admittedly glosses over some small points.)

 

[RunningBum]

Yes, what OldShooter said.



This part of your question is confusing, and may be where you are getting sidetracked.

What I’m struggling with is, if a fund had absolutely zero growth for a year and only had dividends and cap gains, wouldn’t the total return be zero as, while you would have more shares, your fund’s total value would not change? I don't see how a 2% dividend could be considered a 'return' if your NW on that fund didn't change.

Did you fund have 0% growth not counting dividends, or is the value of it the same with reinvested dividends as it was at the start of the year, meaning the fund actually lost 2%, but your holdings stayed the same because you reinvested the 2% dividends.



Keep in mind that you can reinvest dividends or not. Think of the reinvestment as getting the dividends in cash, and then deciding to invest more in the stock. Two separate transactions, which is actually what it is, rolled into one. Tax wise it really is two transactions. The dividends are taxable income. And you have a new purchase of shares with the dividends, which have their own basis, and which increases your total basis in the fund.



If the share price is the same at the end of the year as it was at the beginning, you made 2% because you got that in dividends. You could've put that in your pocket, or you could've reinvested it, increasing the number of shares, and therefore your total investment increased.


If the share price is lower, by the amount of the dividend, your return is 0%. Again you could've taken the dividends and have that cash but a lower amount invested, or reinvest and have slightly more shares at a slightly lower price, balancing to a net 0%.

 

[Chuckanut]

What I’m struggling with is, if a fund had absolutely zero growth for a year and only had dividends and cap gains, wouldn’t the total return be zero as, while you would have more shares, your fund’s total value would not change?

I'm a bit confused.



If the fund had zero growth for a year, where did the capital gains come from? I think you are overlooking that you are using the capital gains to buy more shares. They didn't fall off the turnip truck.

 

[marko]

OP here. Let me try to clarify (but I might again fail miserably).

I'm trying to see if a fund that paid 2% in dividends but showed a reported total return of 6% was really 2% PLUS 4% or if it was true 6% of organic growth.

My assumption is that the organic value of the fund grew by 6% because the 2% of dividends don't count as the fund price dropped accordingly.

By organic growth I mean growth of the fund's price due to an increase in its value due to the market giving it that value and not by dividends being included in the calculation (other than the price drop reflecting the dividend)

In short, sometimes I'll see "Total Return" with an asterisk citing "includes dividends and cap gains" but don't see how they contribute to the total return.

 

[OldShooter]

... I'm trying to see if a fund that paid 2% in dividends but showed a reported total return of 6% was really 2% PLUS 4% ...

Yes. If the dividends were 2%, then the reported price per share must have been 4% higher at year end compared to year beginning. 2+4=6% TR

Not sure what "organic" growth might be as these are not carbon-based objects.

 

[ERD50]

....

My assumption is that the organic value of the fund grew by 6% because the 2% of dividends don't count as the fund price dropped accordingly. ....

I think this is where you are slipping up - true, the price of the stock will drop by 2% on the ex-div date of a 2% div (all else being equal).

But... if at the end of the year, the stock price is up 4%, that means it recovered that 2% and went up a total of 4%. So 4% price change plus 2% div = 6% total return.

Lets say it is an annual div paid in Q3, and we see something like this:

Start of Q1, stock price = $100
End of Q1, stock price = $101
End of Q2, stock price = $102
Near the End of Q3, stock price = $104, then drops $2 after div paid, so ends at $102
End of Q4, stock price = $104

So the stock gained $1 in Q1, $1 in Q2, flat in Q3 after div paid, and up $2 in Q4. So you have 4% in price gain, and 2% divs, for 6% total return.

I don't know what you mean by 'organic' growth either.

-ERD50

 

[marko]

I think this is where you are slipping up - true, the price of the stock will drop by 2% on the ex-div date of a 2% div (all else being equal).

But... if at the end of the year, the stock price is up 4%, that means it recovered that 2% and went up a total of 4%. So 4% price change plus 2% div = 6% total return.

I don't know what you mean by 'organic' growth either.

-ERD50

Ok. THIS makes sense and what I was looking for. Thanks.

In my old business we used 'organic growth' to denote growth from an increase in the base business vs growing revenue via an acquisition or such. An organic growth would be revenue from gaining more market share vs increasing revenue by way of buying another company and accessing their revenue which would be inorganic.

In this case I meant it to be growth of the fund's price due to market value appreciation "as-is" vs wildly changing the fund's basic makeup or some dividend calculation. Apple gaining in price at the news of suddenly discovering or entering a new market/product would be an organic growth vs buying a competitor and accessing their existing revenue stream.

Maybe as they said in the Princess Bride: "that word doesn't mean what I think it means"

 

[CardsFan]

In my old business we used 'organic growth' to denote growth from an increase in the base business vs growing revenue via an acquisition or such.

You have been retired too long to still be using this [-]BS[/-] lingo

 

[marko]

You have been retired too long to still be using this [-]BS[/-] lingo

By now they must be using some other [-]ridiculous[/-] idiotic term. Kids today....harumph!

 

[marko]

I think this is where you are slipping up - true, the price of the stock will drop by 2% on the ex-div date of a 2% div (all else being equal).

But... if at the end of the year, the stock price is up 4%, that means it recovered that 2% and went up a total of 4%. So 4% price change plus 2% div = 6% total return.

Ok. I got this part but....let's say the fund price never budged until dividend time and then went down 2% at dividend time and then never budged after that. It seems the reported total return would be minus 2% even though my NW (total value change) in that fund would be net zero. Yes/no?

 

[RunningBum]

No. It would be 0%.

 

[pb4uski]

Ok. I got this part but....let's say the fund price never budged until dividend time and then went down 2% at dividend time and then never budged after that. It seems the reported total return would be minus 2% even though my NW (total value change) in that fund would be net zero. Yes/no?

No, it would be zero.

$98 + $2 ( div received in cash) divided by $100 at the beginning of the year = 0%

If div were reinvested then it would be $100/$100 = 0%

 

[marko]

No, it would be zero.

$98 + $2 ( div received in cash) divided by $100 at the beginning of the year = 0%

If div were reinvested then it would be $100/$100 = 0%

Ok. That would be MY personal gain/loss but would the fund management report a total return of zero or 2%?

If they'd report zero, that means that dividends/CG's aren't really counted in total return as they cancel the price gains/losses out. Yes?

 

[Rianne]

That's why I like VG personal performance section. The detail is there, year after year. We go back over 10 years and I can look back easily and see the changes. Funds, dividends, gains and losses and why are clear in VG. Don't all investment companies do this?

 

[audreyh1]

Ok. That would be MY personal gain/loss but would the fund management report a total return of zero or 2%?

If they'd report zero, that means that dividends/CG's aren't really counted in total return as they cancel the price gains/losses out. Yes?

Fund management would report a total return of 0%. Total return means paid dividends are included in the return calculation, not just the NAV change.

The NAV change was -2%. The total return was 0%.

Yes, dividends and capital gains distributions count in the total return. Not sure why this example is tripping you up.

 

[audreyh1]

That's why I like VG personal performance section. The detail is there, year after year. We go back over 10 years and I can look back easily and see the changes. Funds, dividends, gains and losses and why are clear in VG. Don't all investment companies do this?

Yes,

And Morningstar reports total return, distribution history, etc. consistently across all funds they track.

 

[marko]

Not sure why this example is tripping you up.

Because when it comes to numbers I have a real blind spot. Seriously.

During my work days, they assigned two accountants to me just to make sure I understood what the numbers meant. I'm pretty good at a lot of other things but once you throw a number in front of something I glaze over.

Thank God they came out with calculators and Excel. When I said "Numbers is hard" on post #1 I meant it.

 

[marko]

Fund management would report a total return of 0%. Total return means paid dividends are included in the return calculation, not just the NAV change.

The NAV change was -2%. The total return was 0%.

...and thank you for this. I see the difference now.

 

[Dash man]

If div were reinvested then it would be $100/$100 = 0%

And I always thought $100/$100 = 1

 

[pb4uski]

And I always thought $100/$100 = 1

Good catch... I meant ($100/$100)-1=0%

 

[RunningBum]

I think you mean $100-$100/$100= 0%. (End price - starting price) / starting price. I don't know where your -1 comes from.


Hmm, I guess your way does work too. I just picture it my way.

 

[pb4uski]

No, I meant ($100/$100)-1=0% .... just like I said.. (ending value/beginning value)-1

Just like ($110/$100)-1 would be 10% or ($90/$100)-1 would be -10%.