There are two components of total return: price and income. Price return is the change in price from the beginning to the end of a period. Income return is the amount of income generated from the beginning to the end of the period. Total return is the combination of price and income return.
For an example, let’s consider the iShares Select Dividend exchange-traded fund (ETF)(DVY). Per the chart below, over the last year ended October 18, 2019, DVY produced a total return of 7.9% and a price return of 4.1%; leaving the income return to be 3.8%. What does this mean and why does it matter?
Retirees often look to their investment portfolio to generate some “spendable” income to supplement pensions, annuities, or social security benefits. Income return is paid in cash and can be used to pay for ongoing expenses or financial goals. Price return can also be used as spendable cash, but that involves selling shares to realize gains (hopefully!); and that is the problem! Since no one knows when price return may be up or down, there is the risk that share price is down when you are selling; of course, not a good thing!
Different asset classes have different price/income return profiles. For example, as in the DVY example above, equity (stock) investments tend to have higher price return compared to income return. Bonds, on the other hand, generally have a larger income component. There are times, however, when the income return from equities is HIGHER than for some classes of bonds (as it is now!) This is a period of time where high dividend-paying stock investments are especially attractive compared to bonds.
For an investor with a need for an income-focused investment strategy, it is important to understand the specific underlying characteristics of the asset classes to be sure they are carefully selected and weighted to provide the appropriate mix for the investor.
For the investor who decides to spend the income component, it works out very well that the price component is still generating price return (hopefully positive over time).