What is a Total Return Index?

A total return index is a type of stock market index that looks at both the capital gains in the value of the stocks as well as the dividends that are received by investors. Most other financial indices only take into consideration the capital gains of the stocks in the index. While this gives you an idea of how much the stocks have appreciated in value, it does not give you a realistic picture of the actual returns of the stocks.

With a total return index, you get a clear picture of exactly how much money is being earned by investors of the stocks in the index. Many stocks do not necessarily appreciate much in capital value, but they might provide large, regular dividends. Many investors put money into established companies that pay dividends instead of growth stocks. Sometimes, these investors realize better returns because of the dividends than they would be able to by investing in other companies. This is not taken into consideration with regular stock market indices. 

This type of index utilizes the assumption that all of the money that is received from cash dividends is automatically reinvested back into the stock in the company. 

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