Calculating total return of your investments

Q. What happens to the dividend when I invest in an index fund based on the S&P or the TSX? The TSX total return exceeds the TSX index. How do I ensure that I am capturing the dividend or total return?

—George Armstrong

A. Index funds simply re-invest dividends in the fund as they are paid out by the companies in the fund. Your dividends are then distributed and reinvested back into the index fund (currently around 2.85% from an S&P/TSX 60 Index Fund). Before distribution, the dividend will be captured in the unit value. These dividends are often referred to as a “distribution yield” in the fund fact sheet. When distributions of a mutual fund are reinvested, the number of units you own increases.

To confirm the actual dividends distributed—they are identified in a box on your T3. Compare the total of the distributions (of all types—dividends, capital gains and other income) that you received to the total of distributions shown on your T3.

The total return calculation of the TSX does usually exceed the TSX index. The reason for this is the calculation methodology. The total return of a security, or in this case the index, refers to the gain or loss, in percentage terms, derived from both the price change as well as any income the investment pays over a specific time period. Total return is a useful measure for investors who want a complete picture of how their securities performed. It’s also the standard that mutual fund and exchange-traded fund companies use when reporting performance figures. By focusing on the total return of your investments, you’ll have a better idea of how you’re doing than if you look at just the price change alone.

A good reference such as longrundata.com can do the work for you to see the total return of an investment. The total rate of return includes the historical annual compounded returns for the period indicated including changes in unit value and the reinvestment of distributions.

Although the total return provides a thorough snapshot of an investment’s performance, most investors won’t actually achieve that return. One reason is taxes. If you hold a stock in a non-registered account, you’ll likely pay tax on dividends—even if they are reinvested in additional shares—and you’ll also pay capital gains tax when you ultimately sell the shares (assuming they rose in price).

Always remember to read the fund fact sheet and prospectus, which contain detailed investment information, before investing.

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Beth Hamilton-Keen, CFA, is a Director of Investment Counselling at Mawer Investment Management Ltd.