Stock returns consist of two components: capital appreciation (the change in share price) and income (dividends received). Total return measures both components together, giving the most complete picture of investment performance. Many investors focus only on price changes, but dividends can contribute significantly to long-term returns, especially for income-oriented stocks and during periods of flat market performance.

Total return is calculated as: Total Return = Capital Gains + Dividends, expressed as a percentage: Total Return % = Total Return / Initial Investment x 100. The annualized return uses the compound annual growth rate (Compound Annual Growth Rate (CAGR)) formula: Annualized Return = ((Ending Value / Beginning Value) ^ (1 / Years)) - 1. This allows you to compare returns from investments held over different time periods.

For example, if you bought 100 shares at $100 per share, the stock is now worth $145, and you received $12 per share in dividends over 3 years, your capital gain is $4,500, total dividends are $1,200, and total return is $5,700 or 57%. The annualized return is approximately 16.24%, meaning your investment grew at an average rate of 16.24% per year compounded. This metric is essential for comparing against benchmarks like the S&P 500.