What Is Total Return?

Includes: NOBL, SDY, VIG
by: Dale Roberts


In the accumulation phase, the most important metric is total return once the risk tolerance level is taken into consideration.

Total return is widely misunderstood as an investment style. Of course, total return is a measurement of portfolio total value.

Focusing on total return vs. total income may provide greater income in the spending phase, when that income is actually required.

Seems crazy to write an article on the most-read investing site on the planet with that subject line, "What is Total Return?" That said, it seems like a basic concept to understand, but as we've found out recently on Seeking Alpha, the phrase can take many authors and readers in many different directions. That may not be the fault of the readers and authors. When misunderstandings or misconceptions are repeated enough times, it's natural and understandable that the often-repeated misconceptions become known as a truth.

In my political "career," I was amazed that a political party in Ontario, to defeat the incumbent, repeated over and over (with the help of the left-leaning press) that the fiscally conservative government had slashed and annihilated public spending and had made deep budget cuts to health and education. The conservative party did no such thing, they had in fact, increased healthcare funding by over 65% and education by some 17% over their term. The communication campaign (misdirection) worked, the conservatives were defeated, the new party came into power and went on to double the debt over two terms. Can you tell what side I am on? :)

If you repeat a misconception enough times, it can become an accepted truth, and it's not the fault of Ontario voters or readers on Seeking Alpha that they accepted those misconceptions as truths - they were repeated enough times to become the truth.

In a recent article entitled Actually It Is All About Total Return... Totally! I offered this definition of total return...

Quite simply total return is a performance measure of "how much you got, how much you making?" The only important number is the portfolio's total value at any given moment. Total return is generated by a combination of capital gains (increase in asset prices) and portfolio income. Fees are on the other side of the ledger and can of course reduce total returns.

I then moved on to why total return can be the most important metric for those in the accumulation phase, because of course, when one heads into retirement, it is better to have $2 million instead of $1 million. Most will agree with that statement, but not all.

In the comments section of the article, and on other recent articles on total return, it became apparent that many did not understand what total return is, or that they then went on to make assumptions that anyone seeking total return might invest or act in many ways.

Essentially, many appear to think that total return is a style of investing. It is not. Total return is a metric, it is a simple measurement of your portfolio value. Check that balance on your portfolio holdings; you'll know how you're doing on the total return front.

Total return can be a measurement of the objective to create the most amount of wealth. And there are many ways to create that wealth. One might invest in bonds only. One may hold a balanced mix of stocks and bonds. One may be an equity-only investor. One may invest in historically high-growth, high-risk sectors. One may invest in IPOs. One may be a value investor. One may be a large cap investor. One may be a broad market index investor. One may be a dividend growth investor. And many or most will combine a few styles or approach(es).

Always to his or her own when it comes to investing. And the most important components of investing will always be risk management. Investors adopt different styles or methods to manage their own risk tolerance level. The only good investment plan is the one that an investor can be true to - and can stay the course. Patience and perseverance are the most important qualities that will lead to investment success.

But when an investor has that goal of creating the most amount of wealth in the accumulation stage, that does not mean that they will act like a "Total Return Investor" and then adopt a set of total return rules of engagement.

Here are some of the statements or claims that were put forth from the comments section of recent articles. Thanks to Seeking Alpha reader and commentor Larry Melman (love that playful handle and photo), who obviously understands what total return is, and pointed out a few of the misconceptions.

Please understand that if you see one of your comments here, I mean you no disrespect.

The implicit premise in the Total Return strategy is the selling off of stocks each year for income.

Here, I think the reader does not separate the accumulation phase and the spending phase. Again, my simple premise in the recent articles was to state that an investor might create the most amount of portfolio value, and then purchase said income. That transition to income holdings would likely happen over many years, and should not be that difficult for a skillful investor who self-directs their investments. In the spending phase, an investor might lower the risk profile of the income and the portfolio value. And again, heading into the spending phase, it is better to have $2 million vs. $1 million.

placing one's emphasis on total return drives one toward tendencies that lead to mistakes

And to drive that point home, an investor added.

If an investor is solely focused on total return what typically happens to that investor when the market takes a dive? They feel the need to protect the amount they have so they sell at the lows...

Well, I think we all make mistakes, no matter what style we embrace. Though I do invite you to read my article entitled I Will Never Make Another Investment Mistake. Full disclosure, I may have made a mistake or two since then. My best-performing portfolio in 2013 on the total return front was my non-thinking Tangerine Balanced Portfolio. It doesn't think. In our self-directed accounts brokerage accounts, I am tempted to think now and again. I was focusing on income more in the self-directed accounts. So my recent experience is the opposite of the above claim. I shaded toward income, instead of total return, I left some money on the table. Mistake, perhaps :).

Here are a few comments on risk:

Focusing only on increasing returns will often lead to taking on more risk.

And ...

Anyone who concentrates on total return is likely to be eventually led down the garden path of high risk and face losing money, not making it.

Every investor should always know their risk tolerance level and match their investments accordingly. If you are seeking the greatest portfolio value, stay within your risk tolerance level, no matter what style of investing you embrace. Taking on too much risk is not the exclusive domain of any style of investor. There's certainly enough of that "to go around". But again, in the hope that the risk-return proposition holds true - take on all the risk that you can reasonably handle.

On dividend growth vs. the "Total Return" investor.

I personally use the term Total Return Investors (capitalized) to distinguish those who prefer to sell shares from those who prefer to receive dividends.

Actually, someone who seeks the greatest total return can be a dividend growth investor. That makes great sense, since dividend growth, when applied correctly, has the potential to outperform the broader market.

It's not Dividend Growth vs. Total Return, it's about using dividend growth to perhaps create the most wealth, compared to trying to create and manage the dividend income. So far, as demonstrated by many SA dividend growth investors, being a total income investor can leave money (lesser portfolio value) on the table. Dividend growth offers a total return gift. I suggest many investors embrace that fact and invest accordingly within their risk tolerance level. Dividend growth can be a great tool to managing risk, and perhaps beat the market. That's a win-win. In this article, I explore how the simple dividend aristocrats index has beat the market.

And more on selling...

Total Return guys would argue that all the stocks I bought during the last crash- MCD, KMB, JNJ, etc - should be sold for capital gains and the money redeployed.

Again, many investors seeking to create wealth might hold those companies and recognize that patience is the most important virtue.

David Crosetti recently published an article on total return, and I appreciate him adding to the conversation. I see David as a shining example of an investor who has largely invested in dividend growth stalwarts, and has practiced legendary patience and consistency to obtain that market-beating potential of dividend growth investing. All said, David is a classic (and very successful) value investor, whether that applies to his DG holdings or non-dividend payer holdings. I always suggest DG investors pay attention to David's articles and ideas and investment philosophies.

In that article, he commented that ...

One might assume that total return investing requires an investor to be a trader. I think this is a misconception for a number of reasons. First, holding quality companies over a long period of time allows for price appreciation and in the case of a dividend investor, the reinvestment of those dividends into additional shares of the underlying stock.

He nailed it with this.

I believe that a DGI can and should look at his holdings through the lens of total return and that should help the investor to make a more rational judgment as to whether or not a particular stock should remain in his portfolio moving forward.

Again, in the end, it will all come down to "how much you got". If you have a greater portfolio value, you will be able to purchase more income, if you choose to go that income route in the spending stage. More money can equal a superior quality of life in retirement, with more options for spending and gifting.

And always, to his or her own. But we should not rationalize away poor performance, and we should know how we are performing against the benchmark, if that benchmark is available. We see dividend growth investors comparing their performance to the S&P 500, when there are benchmarks and ETFs available such as the S&P 500 Aristocrats (BATS:NOBL), and representing the aristocrats from the S&P 1500, there is SDY plus dividend growth ETFs, such as Vanguard's VIG, and actively managed funds, such as Vanguard's VDIGX. Of course, each benchmark or ETF will have its own risk or volatility level, and that should always be taken into consideration. And again, take on the risk that you can handle.

No matter what your investment style, if you are not beating your benchmark on total return, then you are essentially leaving money on the table.

When something is important, measure it.

Thanks for reading, thanks for your comments to follow. Happy investing, and be careful out there.

Disclosure: I am long SPY, DIA, VYM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Dale Roberts is a mutual fund associate at Tangerine Bank. The Tangerine Investment Portfolios offer complete, low-fee index-based portfolios to Canadians. Dale's commentary does not constitute investment advice. The opinions and information should only be factored into an investor's overall opinion forming process.