Annual return is the total change in the value of an investment over the course of one year. This return is comprised of the following components:
- Increase in the market value of the investment
- Dividends paid on the investment
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. 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.
The annual return percentage is used to compare the performance of different types of investments.