Total Return (Series)

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Total Return 1.0

#TotalReturn 1.0. When an investment generates interest/dividend that is reinvested, and the price also changes, TOTAL RETURN [TR] takes into account their combined effect. So, if one has an account that initially has $1,000.00 and becomes $2,000.00 in 12 years [i.e. 2x or +100%], the TR is 100x[2^(1/12) - 1]%, or 5.95% annualized. There is a RULE OF 72 that money doubles in (72/%rate) years, or 72/years equal %rate, and that would give the rate as 72/12 or 6% annualized [close enough!]. Note that interest rate COMPOUNDING is assumed. If the money is also added or withdrawn, then the Excel function IRR or XIRR can be used to find the %rate. Simple ONLINE CALCULATORS can be used when the deposits or withdrawals are periodic and uniform – they go by names such as deposit/mortgage/loan calculators. Interesting questions arise when the interest/dividend is withdrawn/consumed [i.e. NOT REINVESTED], then what is the TR? Answers range from inapplicability of TR to assuming some %rate for amounts consumed [0%? %Inflation?]; anyway, the answer depends on some additional assumptions that vary for individuals, so no general agreement is possible. Other posts on TR for STOCKS and BONDS will follow later. #PersonalFinance; 11/22/20 AM.

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Total Return 1.1 - Decomposition via Earnings Growth

#TotalReturn 1.1. TR of a STOCK can be split into 2 or more components. This post is on 3-component split involving earnings [E]. It works well for companies with history of earnings.

%TR = %Dividend_yield + %Earnings_growth + %Change_in_P/E

Such companies can emphasize current dividends and/or earnings growth, and the market conditions & expectations affect changes in the P/E ratio. As changes in P/E occur over long cycles, its affect becomes relatively small. So, the long-term TR can be approximated by the first 2 terms [also called Gordon equation],

%TR = %Dividend_yield + %Earnings_growth

Examples are AAPL, HD, GOOGL, MSFT, V, etc & growth & growth-value blend FUNDS. When applied to market indexes with future projections for the 3 terms, STRATEGISTS can come up with future market forecasts [you can tweak those with your own estimates]. #PersonalFinance 1/5/21.

Edit/Add, 2/19/24. Some updated data from Ben Carlson beyond John Bogle's in Twitter LINK.
awealthofcommonsense.com/2024/02/whats-driving-the-stock-market-returns/

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Total Return 1.2 - Decomposition via Dividend Growth

#TotalReturn 1.2. Another 3-way split for STOCK TR involves dividends [D]. It works well with companies with history of paying dividends.

%TR = %Dividend_yield + %Dividend_growth + %Change_in_P/D

Such companies can emphasize current dividend and/or dividend growth, and the market conditions & expectations affect changes in the P/D ratio. As changes in P/D occur over long cycles, its affect becomes relatively small. So, the long-term TR can be approximated by the first 2 terms [also called Gordon equation],

%TR = %Dividend_yield + %Dividend_growth

Examples are JNJ, KO, MCD, PG, etc & dividend & equity income FUNDS. #PersonalFinance , 1/6/21 AM.

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Total Return 1.2 - Decomposition via Dividend Growth

#TotalReturn 1.2.1. Late John Bogle, fund pioneer & founder of Vanguard, popularized the concepts in Total Return 1.1 &1.2 posts in his books, writings & speeches. These concepts, when applied to broad market indexes with future estimates of components, remove the mystery from market strategists’ projections for future market returns. Investors can also develop their own estimates. Even when these estimates turn out to be off the mark, having reasonable expectations for future returns from investments is a useful exercise. #PersonalFinance , 1/6/21 AM. en.wikipedia.org/wiki/John_C._Bogle

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Total Return 1.3 - Decomposition via Sales Growth

#TotalReturn 1.3. Still another 3-way split for STOCK TR components involves sales . It works well with emerging companies with fast sales growth.

%TR = %Dividend_yield + %Sales_growth + %Change_in_P/S

These companies don’t pay any dividends, may burn cash [so, no earnings] until a certain scale is reached, focus on fast/hyper sales growth. The market conditions & expectations affect changes in the P/S ratio. So, the long-term TR can be just the last 2 terms,

%TR = %Sales_growth + %Change_in_P/S

Over time, both sales growth & P/S decline. Investors hope for net positive returns, but risk of loss are high. Examples of such public companies are NFLX, TSLA, WDAY, ZM, etc. However, many such companies trade in private-equity market. A recent trend is for many companies to remain private longer, grow with venture capital or private-equity funding, & even become Unicorns [$1+ billion market-cap].

Having seen 3-way splits for TR in 3 different ways [via E, D, S], you can come up with similar other splits, via book value , cash flow [CF], etc. Unfortunately, due to financial engineering, B for many nonfinancial companies is almost meaningless. And after emphasizing book value for Berkshire Hathaway for many decades, #WarrenBuffett has recently stopped focusing on B. #PersonalFinance , 1/7/21 AM.

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Total Return 1.4 - Bonds

#TotalReturn 1.4. For TR of a BOND, the terminology used is yield-to-maturity [YTM]; it takes into account the coupon rate, the PAR [or, maturity value] & the current price. If the current interest rate is below/above the coupon rate, then the bond sells at PREMIUM/DISCOUNT from par to provide acceptable YTM. At a high enough current price, a bond may have NEGATIVE yield [this is the case with several European & Japanese sovereign bonds]. A bond may have early “CALL” provision & then yield-to-call [YTC] may be used. If there are multiple or complex “call” provisions, then yield-to-worst [YTW] for the worst possible outcome may be used. As “call” is at the option of the bond issuer, the bond investor can make a judgement on the current price to account for uncertainties. If a bond DEFAULTS, then none of this applies & one may have a huge potential loss [see post 1/8/21 for credit ratings of bonds].

For BOND PORTFOLIOS, the notion of YTM can become tricky due to assumptions that have to be made. In order to provide consistency, the SEC has prescribed a special but complex calculation based on the YTM of component bonds to calculate 30-day SEC yield [Form N-1A]. It indicates prospective long-term TR for the bond fund – but rapid changes in interest rates may affect that. Weighted-average price for portfolio above/below par indicates if the bonds are predominantly premium/discount bonds. Some funds may use premium bonds deliberately to juice up current distributions, but the flip side is declining NAV. A fund using many discount bonds is trading off current distributions for potential capital gains & may claim to use a total-return strategy. DURATION d of bond portfolio indicates its interest rate sensitivity [+/- 1% change in rates (or, +/- 100 #BasisPoints or bps) causes opposite -/+ d% change in portfolio value; post 12/30/20]. #PersonalFinance , 2/10/21.