Updated: December 1, 2019
Any person who has been listening to financial experts and other capital market experts have probably run into complex financial terms such as total return and dividend investing.
The terms become even more confusing when someone who does not have any training or experience in finance comes across them. This article is focused on discussing the meaning of the two terms while, at the same time, portraying the differences between them.
Total return is mostly defined as the total value of an investment property after a particular period. This means that it has to be calculated after a particular period.
If an investor invests his or her assets in a particular stock, he or she expects the investment to generate returns. These returns are what ordinary individuals term as profits generated from the asset.
However, the stock might have appreciated in their intrinsic value depending on various market trends. The total change in the intrinsic value of an asset, plus the profits generated, forms the total value of an asset.
People understand that dividends are the amount of money that an investor gets in a particular financial period when a company declares profits.
The amount that individuals receive in the form of dividends depends explicitly on the number of shares they hold in a particular organization. The more the number of shares, the higher the dividends.
Investors have devised a strategy where they invest back the dividends they get into the same company so that, in the future, they can get substantial financial returns.
The process of investing dividends back to the giving company is known as dividend investing. This strategy has made investors consider investing in the companies that offer huge dividends so that they can develop a dividend investing strategy for future financial gains.
Dividend Investing vs. Total Return
From the definition of the two financial terms, it is clear that total returns refer to the amount that an investor gets after investing in a particular investment. It is calculated by adding the profits generated by the investment and the intrinsic value gained by the investment.
On the other hand, dividend investing is an investment strategy that involves increasing the value of the investment by re-investing the dividends gained from a particular investment. Dividend investment is a long-term strategy that focuses on enhancing the financial well-being of an investor.
Despite the differences, there is a significant relationship between total returns and dividend investment.
Dividends form a significant proportion of the total returns. Before investing dividends back in the same investment plan, the amount received can be used in calculating the total returns from a particular investment.
However, total returns cannot be used to form or aid in dividend investing. The long-term idea behind dividend investment is increasing the value of the total returns. The more the investors invest profits back in the same property, the higher the total returns.
Another significant difference to consider between total returns and dividend investing is that total returns focus on immediate results while dividend investment focuses on maximizing the value of a particular investment in the future.
After investing in a single year, an investor who is highly interested in total returns will quickly compare the profits earned to determine whether his or her investment has been profitable.
He will also determine the intrinsic value gained by his property so that he can come up with a precise amount, total return, which can be used to judge the performance of his investment.
However, an investor who is highly concerned with maximizing the value of his investment will not concentrate or take time to determine the profits and the intrinsic value of the property. He or she will go further and invest the dividends, profits, with the sole aim of ensuring that the value of the property will be very high in the future.
There has been a massive contrast between total returns and dividend investment. A large number of financial analysts have been seen recommending to individuals that they can consider dividend investment rather than considering total returns.
This article is not specialized in determining the best form of investment for investment purposes but on discussing the apparent differences. It is the role of investors to determine the best investment plan.
This post is written and submitted by Mindy Laughton.