I understand Price returns and Total returns for stock indices. For example, total returns account for Dividends paid by the underlying stocks assuming they are reinvested back into the same. How do we calculate the embedded Dividend returns? The 2 choices are:

(1 + Price ret) * (1 + Dividend ret) = 1 + Total ret


Price ret + Dividend ret = Total ret

My calculations show that option II is the way to go, but I wanted to confirm with a broader audience. Returns can be since inception, or annualized.

1 Answer 1


Dividends are not really "return" since the price of the index is reduced by the amount of the dividend, but the difference between the total return and the price return as a function of the starting price would be the total amount of dividends, since

    Rp = (P1 - P0)/P0
    Rt = (P1 - P0 + Div)/P0
==> Rd = Div/P0 = Rt - Rp

Note that this would not exactly equal the dividend yield of the index, since that is calculated from the price at the time of the dividend.

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