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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
REIT total return combines distributions with the gain or loss in your shares' value over a stated period. To measure it fairly, include the relevant costs, handle reinvested dividends only once, and account for money added or withdrawn along the way.
A dividend shows that money was paid to shareholders. It does not tell you whether the investment gained value overall. Total return looks at both payments and the change in value, which can be positive or negative. FINRA makes this distinction when explaining investment returns. [1]
Suppose you buy 1,000 REIT shares for $20 each. Your starting investment is $20,000, before any costs. Over one year, the REIT pays $1 per share in cash, and the shares end the year at $22.
You received $1,000 and your shares gained $2,000 in value. Together, that is a $3,000 gain, or 15% of the starting investment, before fees and taxes. If the shares instead finish at $17, the $3,000 decline exceeds the $1,000 payment. The combined result is a $2,000 loss, or 10%.
These are hypothetical results, not forecasts. They show why I would not describe an investment's success by pointing only to the checks that arrived. Cash can support a spending need while the investment as a whole loses money.
For one purchase, no later contributions, and distributions taken outside the investment, start with this calculation:
Holding-period return = (ending investment value + cash distributions received − starting investment amount) ÷ starting investment amount.
Use consistent treatment of fees. If purchase costs are part of the starting amount, do not subtract them again. If selling costs reduce the final proceeds, use those net proceeds. If you still own the shares, the ending value is a valuation, not cash from a completed sale.
In the first example, the calculation is ($22,000 + $1,000 − $20,000) ÷ $20,000 = 15%. The cash payments are outside the ending share value. That detail matters.
If you instead measure an entire brokerage account and the dividends remain there as cash, the account's ending value already includes them. Adding the same dividend again would overstate performance. Decide what you are measuring before choosing the inputs.
A share-price chart measures the price of a share. A position report may include shares but exclude cash paid away. A whole-account report may include shares, cash, and several other investments. Those reports can all be accurate while showing different numbers.
The SEC's sample account statement separates holdings, deposits, withdrawals, income, reinvestment, and changes in investment value. It also warns that values for infrequently traded assets may be estimates based on market data that is not current. [5]
Imagine $20,000 of shares grow to $21,000 and pay $1,000 into the same otherwise empty account. The position is worth $21,000; the whole account is worth $22,000. The gain across the account is $2,000 before costs and taxes.
Now suppose you transfer the $1,000 dividend to your checking account. The brokerage account ends at $21,000, but you have not lost that $1,000. A performance calculation must treat the transfer as a withdrawal, not as a market loss.
Write the boundary at the top of your worksheet. “This REIT position, including cash paid to me” is much clearer than “my return.”
A quoted dividend yield compares a payment amount with a share price. It may use past dividends, the latest declared payment multiplied by a year, or another stated method. The result can change because the dividend changed, because the price changed, or both.
Assume a REIT pays $2 annually per share. At a $40 share price, that is a 5% yield. At a $25 price, the same $2 is an 8% yield. The investor who bought at $40 has not received more annual cash merely because the market price fell.
A yield based on the original purchase price answers another narrow question. It may describe cash relative to what you paid years ago, but it does not measure today's value or the return available from today's decision.
For a performance review, keep the cash rate separate from the gain or loss. A large yield can sit next to a large loss. A lower yield can sit next to a gain. Neither combination tells you what will happen next.
Reinvestment uses a payment to buy more shares. Those shares can later earn payments and rise or fall in value. The added shares become part of the position you measure.
Consider a simplified example with one reinvestment. You start with 100 shares at $10, for $1,000. A $1-per-share distribution provides $100. The plan buys 10 more shares at an assumed $10 price, with no fees.
You now hold 110 shares. If the ending price is $11, the position is worth $1,210. With no outside deposits or withdrawals, the result is $210, or 21%. Do not add the $100 distribution to $1,210 again. It already bought shares inside that value.
For comparison, if you took the $100 in cash and retained 100 shares worth $11 each, you would have $1,100 of shares plus $100 cash: $1,200 in total. The $10 difference in this example comes from the later gain on the 10 extra shares.
The price sequence is an assumption, not a claim that dividends create free wealth. Reinvestment increases the amount at risk. If the later share price falls, those added shares fall too.
A published total-return chart often assumes dividends are reinvested. The SEC's Item 201 performance-graph rules use dividend reinvestment for covered company comparisons. Read the chart's notes rather than treating a total-return line as a price-only line. [4]
If the chart shows that a hypothetical $100 became $140, first ask what happened to the dividends. If they were reinvested in the calculation, $140 already reflects that assumption. Adding a separate dividend total would count part of the result twice.
Also check the share class, dates, benchmark, currency, and cost treatment. A graph for one class need not match another class with different fees. A start date just after a large decline can tell a different story from a start date before it.
Your result may differ because you bought on a different date, paid a different price, added money later, took dividends as cash, or incurred other costs. Those differences do not automatically mean either report is wrong.
A cumulative return measures the whole holding period. An annualized return expresses that result as a steady yearly compound rate. It does not mean the investment actually earned that rate in every year. FINRA explains why dividing a multiyear gain by the number of years can overstate the annual compound rate. [2]
Suppose $100,000 becomes $144,000 over two years, with all income reinvested, no outside cash flows, and the relevant costs already reflected. The cumulative return is 44%. The annual compound rate is 20%, because $100,000 × 1.20 × 1.20 = $144,000.
Dividing 44% by two gives 22%, which is not the annual compound rate. For a positive ending value and no outside cash flows, the formula is:
Annual compound rate = (ending value ÷ starting value)1 ÷ years − 1.
Do not apply that simple formula to a pile of distributions received at different times as though they all arrived at the end. If you withdrew or added money during the period, the dates need attention. A suitable cash-flow calculation can answer that question more accurately.
Start with $100,000. A 20% gain brings it to $120,000. A 20% decline the next year reduces it to $96,000. The arithmetic average of +20% and −20% is zero, but the investor has lost $4,000.
The gain and loss apply to different dollar amounts. The annual compound result is about −2.02%, because $96,000 ÷ $100,000 = 0.96 and the square root of 0.96 is about 0.9798.
This example has no distributions, added funds, withdrawals, fees, or taxes. It isolates the math. Real performance reports need to explain which kind of average they use.
It also shows why a recovery percentage differs from a decline percentage. After a 20% loss, $80 must gain 25% to return to $100. A 20% rebound only gets it to $96. The same logic applies whether the asset is a REIT or another investment.
Suppose an account starts at $100,000, receives a $50,000 deposit, and ends at $153,000. The account balance grew by $53,000, but $50,000 came from you. With no withdrawals, the net investment change is $3,000.
That dollar result is useful, but it does not give the full percentage return. Was the deposit made at the start, halfway through, or on the last day? The answer changes how long the extra money was exposed to gains and losses.
Two methods help address this. A money-weighted return reflects the size and timing of your contributions and withdrawals. A time-weighted return links results for separate periods to remove the effect of those outside cash flows. They answer different questions, as CFA Institute's performance-reporting guidance explains. [3]
A money-weighted result can help describe your experience with the dollars actually invested. A time-weighted result can help compare the investment's performance with a suitable benchmark. Ask your provider which method it uses and why.
Here is a hypothetical two-year example with no dividends, fees, or taxes. An investor starts with $10,000. The investment rises 20% during year one, reaching $12,000. The investor then adds $90,000, bringing the account to $102,000.
In year two, the investment falls 10%. The account ends at $91,800. The investor put in $100,000 altogether and now has $91,800: an $8,200 dollar loss.
Yet the investment's linked two-year return is positive: 1.20 × 0.90 − 1 = 8%. An investor who left only the original $10,000 in place would finish with $10,800.
There is no contradiction. More of the first investor's money was present for the bad year. A money-weighted calculation reflects the actual dates and amounts; the 8% linked result removes the effect of the added money. Neither number can replace the explanation.
Do not divide the $8,200 loss by the starting $10,000 and call that the investment's return. That ignores the large deposit and produces a misleading percentage.
Include the costs that apply to your investment and account. The SEC identifies both transaction charges and ongoing expenses, including some that do not appear as a separate bill. Their effect can grow over time because money spent on fees no longer earns investment returns. [6]
For a simple example, assume you pay $10,100 in total to buy $10,000 of shares. Later, you receive $500 in cash distributions and $10,200 of sale proceeds after selling costs. The dollar gain is $600: $10,200 + $500 − $10,100. The holding-period return is about 5.94%.
That calculation is before tax and does not annualize the result. It includes the stated purchase and sale costs once. If a published return already deducts a fund's operating expenses, subtracting those expenses again would create a different error.
Ask what “net” means in a report. Net of property costs may still be before company costs, selling charges, or investor account fees. A useful comparison identifies each layer instead of relying on one reassuring label.
You can measure a return before selling, but label the ending value honestly. Listed-share prices are market observations, not promises of the price you will receive for a future sale. A private or non-traded REIT may report an estimated net asset value based on a valuation process.
The SEC's non-traded REIT guidance discusses both valuation limits and restrictions on share repurchases. A reported value does not create an unconditional right to sell at that value. [7]
Suppose an investor contributed $100,000, received $12,000 of cash over a stated period, and holds shares with a reported estimated value of $95,000. The simple estimated combined gain is $7,000 before omitted costs and taxes. It is not a realized sale result or an annualized rate.
If the investor later sells the whole position for $88,000 net, with no further payments, total proceeds plus earlier cash equal the original $100,000. The dollar gain is zero. The earlier valuation helped describe the position at a point in time; it did not lock in the sale price.
Selling part of a position does not end the calculation for the rest. Include net sale proceeds, cash payments, and the remaining shares' value. Do not count sold shares as though you still own them.
For example, start with 100 shares bought for $20 each, or $2,000. Sell 50 shares for $22 each and receive $1,100. At the review date, the other 50 shares are worth $21 each, or $1,050. Assume you also received $100 in cash distributions.
The combined value received or still held is $2,250. That is a $250 gain, or 12.5%, before costs and taxes, with no other cash flows. Part of the result has been received and part remains exposed to the market. The tax gain on the sold shares is a separate calculation using the applicable share-lot basis.
Your tax basis helps determine taxable gain or loss. It can change because of reinvested dividends, nondividend distributions, and other adjustments. A performance calculation follows all the economic cash flows and values. The two records serve different purposes. [8]
Assume you invest $100,000 and later receive $10,000 treated as a nondividend distribution. With no other adjustments, basis becomes $90,000. If you then sell for $90,000, there may be no gain in this simplified tax-basis example.
Economically, you received $10,000 plus $90,000, equal to your original payment before costs and taxes. The distribution was not a 10% profit just because it arrived as cash. Nor should you call the $10,000 decline in share proceeds a separate economic loss without including the earlier payment.
Use your CPA to determine tax results. A quoted pretax return does not tell you your spendable after-tax return, and reinvesting taxable dividends does not by itself defer their tax.
Someone living on investments may care about when gains and losses happen, not just the ending percentage. Selling shares or withdrawing cash after a decline can leave less money available for a later recovery.
Consider two hypothetical years with a 20% loss and a 25% gain, in either order. Without withdrawals, $100,000 returns to $100,000 in both cases.
Now withdraw $10,000 at the end of each year. With the loss first, $100,000 falls to $80,000, then the withdrawal leaves $70,000. The next year's 25% gain brings it to $87,500, and the second withdrawal leaves $77,500.
With the gain first, $100,000 rises to $125,000, then falls to $115,000 after the withdrawal. The next year's 20% loss brings it to $92,000; the second withdrawal leaves $82,000. Each investor took out $20,000, but the remaining balances differ by $4,500.
The example ignores costs and taxes and does not model a specific REIT. It shows why a smooth average-return assumption is not enough for a spending plan.
Use the same start and end dates, dividend treatment, cost treatment, and calculation method. Compare a total-return number with another total-return number, not with a price-only chart. Read whether an index includes dividends and whether a fund's reported figures include its costs.
Also compare the risks taken to get the result. Two REITs can earn the same return while using different debt, property types, liquidity terms, and development plans. A single percentage cannot show all those differences.
Separate completed results from forecasts and estimated values. A target internal rate of return depends on assumptions about cash timing and future value. It is not a result already earned. A strong past period does not establish a reliable rate for the next one.
I want a performance review to explain both what happened and what remains uncertain. The number becomes useful when you understand the money behind it, the time involved, and the risks you still own.
Yes. A decline in share value can exceed the payments received. Include both when measuring total return, then account for applicable costs and taxes.
Usually not. If the reported total return already includes dividends, adding yield counts them again. Read the method and determine whether the number is price return or total return.
No. It describes a constant compound rate that would produce the stated result. Actual yearly returns can vary widely, including losses.
Your purchase date, price, cash flows, reinvestment choice, share class, and costs may differ from the chart's assumptions. Ask for a reconciliation using your actual records.
They buy additional shares but are not new outside cash in an account-level performance calculation. Their tax-basis treatment is a separate matter. Keep the cash-flow boundary consistent.
Yes, if it is clearly identified as an estimated ending value with its date and limits. It is not proof of a sale price or a promise that you can withdraw that amount.
Not when deposits or withdrawals affect the balance. Separate those movements from investment gains and losses, then use a method that accounts for their timing.
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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