What is Annual Return?

Annual return is the total change in the value of an investment over the course of one year. The annual return percentage is used to compare the performance of different types of investments. It is also useful for determining your gains or losses on an investment over an annual measurement period.

How to Calculate Annual Return

The annual return is comprised of the increase in the market value of an investment and the dividends paid on it. The total amount of these returns is divided by the amount of the investment at the start of the measurement period to derive the annual return percentage. The formula is:

(Increase in market value + Dividends paid) ÷ Beginning investment value = Annual return

If you have calculated the rate of return for a one-month period and want to annualize this figure, then simply multiply it by 12. However, be aware that many factors can impact your investment over the remainder of the one-year measurement period that can impact your projected annual return.

Example of Annual Return

For example, if an initial investment of $1,000 experiences an increase of $100 in the market value of the instrument and also pays a $50 dividend, then the investment has generated a 15% annual return.