Total return
Capital gain + dividends + interest, all rolled into one number. Always quote total return, not price return, when comparing equities to fixed income or to an index.
Total return is a comprehensive measure of your investment's performance in Nigeria. It includes not just the increase or decrease in the price of your investment, but also the income it generates through dividends and interest. For example, if you invest in a stock listed on the Nigerian Exchange (NGX) and the company pays a dividend, or if you have funds invested in Treasury bills (T-bills) which earn interest, these earnings are factored into your total return. This holistic view is crucial because it shows the real benefit of your investment over a period of time.
Imagine you bought shares in a company like Nigerian Breweries, and over the year, the share price increased by 5%, but the company also paid a dividend of 10%. If you only look at the price return, you might think you've only made a 5% gain. However, when you consider the total return, which adds the dividend to the price increase, you see that your actual return is 15%. This is the figure you should use when comparing your investment to others or to a benchmark like the All-Share Index.
In the Nigerian context, it's also important to consider taxes. For instance, if you're earning dividends from your investments, you'll need to account for the 10% withholding tax (WHT) on dividends. Similarly, when you sell shares at a profit, you'll pay a 10% capital gains tax (CGT). These taxes reduce your net return, so they must be factored into your total return calculation. For example, if you sell shares for a 10% gain but pay 10% in taxes, your net capital gain is only 9%.
The Central Bank of Nigeria (CBN) also plays a role in your investment's total return through its Monetary Policy Rate (MPR), which is currently around 27.50%. This rate affects interest rates across the economy, including the returns on fixed income investments like T-bills. A higher MPR can mean higher returns on these investments, which in turn can increase your total return. However, it's also important to consider the impact of inflation, which can erode the real value of your returns.
Why it matters: Understanding total return allows you to make more informed decisions about your investments. By considering all components of your return, including income and taxes, you can better compare different investment opportunities and understand the true performance of your portfolio. This knowledge helps you to maximize your returns and achieve your financial goals.