Financial Advisor to clergy and religious educators 

Your Retirement Portfolio – Income or Total Return
Total return offers the best measure of a portfolio’s performance. It’s defined as the percentage change, over a specified period, of your portfolio’s value, adjusted to account for the reinvestment of all distributions of dividends and capital gains. Income dividends is the interest earned on bonds or cash investments, or the dividends paid from common stock holdings. Capital gains distributions come into play when securities are sold at a profit. (Or, conversely, when securities are sold at a loss which triggers a capital loss, that can offset realized gains.). 

Total return is a useful tool for comparing the performance of your portfolio against an appropriate benchmark (typically the return as stated in the Investment Policy Statement part of your financial plan.). 
It's important to know how much of the total return is attributable to each of the components it consists of. Cash investments, bonds, and stocks differ in how much of their total returns derive from income dividends (income returns) and in how much come from capital gains distributions (capital returns). Knowing how your portfolio’s total return is apportioned, you can assess how tax-efficient it is, and how much steady income you can expect it to produce. Keep in mind that total return measures past performance only; it cannot predict future results. Also, total return does not show your portfolio’s volatility (fluctuation over time). For that, you must examine year-by-year returns and use other formulas. 

Capital returns are unpredictable and can fluctuate significantly. But the impact of those fluctuations lessens over time. Income returns tend to be more durable and predictable than capital returns. Income returns are taxed at rates ranging from 15% to 39.6%, while capital returns are taxed at a maximum rate of 20%. Therefore, if you invest in a taxable account, a fund that produces mainly capital returns may be more tax-efficient than one producing primarily income returns. 

The table below shows how the components of total return have differed over time for the three asset classes. 

Components of Total Return 
(Average Annual Returns: 1926–1998) 

 Income Return Capital Return Total Return
Cash Investments          3.9%              0%               3.9%
(U.S. Treasury bills)

Bonds                           6.1%           –0.4%             5.7%
(long-term U.S. corporate bonds)

Stocks                         * 4.7%            6.5%           11.2%

* Standard & Poor's® 500 Composite Stock Price 
Index Source: The Vanguard 

Many investors confuse yield with total return and they tend to overemphasize dividend and capital gains distributions. Yield is just one component of total return and it measures current income (dividends or interest) produced and expressed as a percentage. Generally, yield is based on income earned over the past 30 days and is annualized, or projected forward for the coming year. Yield does not include any capital gains distributions. Yield does not reflect portfolio fluctuation —which sometimes accounts for much of a total return number. 

Dividend and capital gains distributions are key components of total return. How a portfolio's total return is apportioned can have important tax consequences. In a taxable account, most distributions are taxable, even if you reinvest them. But you are not taxed on price appreciation or depreciation until you sell. Therefore, you could end up keeping more of the return produced by the portfolio that makes fewer distributions. 

Remember that your portfolio return figures are most meaningful when compared with the returns for an appropriate benchmark index which takes into account your particular investment mix, and purchasing and redemption activity. The Investment Policy Statement of your financial plan will outline the return your portfolio needs to achieve in order to reach your goals – whether they be to supplement your income from other sources, or to pass on as large a legacy as possible

Dresner Financial Planning Dresner@clergyplanning.com
2359 Salisbury Road Westbury, NY 11590
(888) 200-9670
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