What is a return?

Return is the financial gain—or loss—you get from an investment. The concept covers everything from stocks and bonds to real estate and mutual funds, and it’s the most important figure to know if you want to assess whether an investment has been worth it. This article gives you a complete overview of what return is, how to calculate it, and how it differs from dividends.

Contents

Return is your financial gain—or your loss

When you invest a sum of money, you want it to grow—or, at the very least, ensure that inflation doesn’t erode its value. What you actually gain or lose on the investment is your return.

If you make money on your investment, you have a positive return. If you lose money, you have a negative return. You calculate the return in either a percentage or in kroner, and it represents the total profit after deducting costs such as trading fees.

How to Calculate Your Return

The formula for return is simple: subtract your initial investment from the current value, and divide the result by the initial investment.

Return (%) = (Present Value – Initial Investment) ÷ Initial Investment × 100

In practice: You buy shares for 5,000 DKK. The value rises to 5,100 DKK. You have thus earned 100 DKK, corresponding to a return of 2 percent—before deducting buying and selling costs.

The same logic applies when you invest in real estate. Here, the return typically consists of two parts: the ongoing rental income (after operating expenses) and any appreciation in value that you realize upon sale. If you buy a property for 10 million kroner and later sell it for 11 million kroner, after having received 500,000 kroner in net rental income along the way, you’ll have a total return of 1.5 million kroner over the period of ownership.

The Difference Between Return and Dividend

Many people confuse return on investment with dividend yield, or think they are the same thing. They are not.

All investments yield a return—positive or negative. Only some investments pay dividends, which is when a company or investment fund distributes a portion of its profits to you as an investor.

The key point is that dividends aren’t something you receive on top of your return—they’re part of it. If you buy an investment certificate for 100 kr. and it’s worth 125 kr. at the end of the year, you’ve earned a return of 25 kr. If the fund also pays out a dividend of 10 kr., the value of the investment certificate decreases by exactly that amount, leaving you with a certificate worth 115 kr. and 10 kr. in your account. Your total return is still 25 kr.—it’s simply split between capital gains and the dividend paid out.

If you don't need the dividends right now, reinvesting will typically give you a better overall return over the long term.

The return depends on what you invest in

Returns vary depending on the type of asset you invest in:

Stocks generate returns through capital gains and, in some cases, dividends from the company. The stock market typically fluctuates more than other asset classes, and returns vary significantly from year to year.

Bonds generate returns primarily through interest income (the coupon rate) and changes in market price if the bond is traded during its term.

Real estate generates returns through ongoing rental income and any appreciation in value that you realize when the property is sold. Returns vary depending on the type of property—whether it’s office space, retail space, warehouse and production facilities, or entire office buildings —and location, condition, and the term of the leases all play a major role in both rental income and capital appreciation. Learn more about how to use the price per square meter and a cap rate calculation to estimate the potential return on a property.

Commodities such as oil, gold, and grain generate returns through price fluctuations, with supply, demand, and geopolitical factors often driving the trend.

Mutual funds and investment associations pool various assets—such as stocks, bonds, or real estate—into a single security. The overall return depends on the performance of the underlying assets, while you achieve risk diversification by spreading your investment across multiple securities.

Realized and Unrealized Returns

The return on an investment fluctuates over time, and you won’t know your final return until the day you sell. Until then, the return is unrealized, and it can both rise and fall along the way.

Stay calm if your investment shows a negative, unrealized return for a period of time—the loss or gain only actually materializes when you sell. If you receive regular dividends or interest, however, these are included in your return as soon as they are paid out.

Historically, the stock market has yielded an average annual return of 7–10 percent over the past 100 years. However, past performance is no guarantee of future results.

The Relationship Between Risk and Return

All investments involve risk, and there is a clear correlation between the level of risk and the expected return. A high-risk investment can typically yield the highest return—but it also carries the greatest risk of a significant loss.

How much risk you should take depends on your time horizon: the longer it is until you need the money, the more risk you can typically tolerate, because you have time to absorb fluctuations along the way.

Spread your investment across multiple securities or asset classes to reduce risk. You can achieve risk diversification by, for example, investing in a fund or by combining stocks, bonds, and real estate.

Tax on Returns

You must pay taxes on your returns, and the tax rate depends on how and in what you invest. If you invest your disposable income, taxation is typically divided into three categories: dividend income (27 or 42 percent), capital gains (typically 30–42 percent), and stock savings accounts (17 percent).

There is also a difference depending on whether the investment is subject to inventory taxation or capital gains taxation. Under inventory taxation, you pay tax each year on the change in value. Under capital gains taxation, you do not pay tax until you sell the investment and thus realize the gain—however, dividends and interest are always taxed in the year they are paid out.

Tax rules for investing can be complex and depend on your specific situation. Therefore, consult an accountant or tax advisor before developing your investment strategy.

In a nutshell

Return is the total gain or loss you realize from an investment, and you can calculate it in both percentages and kroner. The type of asset determines what the return consists of—for stocks, it’s capital gains and dividends; for real estate, it’s rental income and appreciation. Dividends are part of the return, not an addition to it, and you won’t know your final return until you sell the investment. The higher the risk, the greater the potential return—but the same applies to losses, and you must pay taxes on the return according to rules that vary by investment type.

There is also a difference depending on whether the investment is subject to inventory taxation or capital gains taxation. Under inventory taxation, you pay tax each year on the change in value. Under capital gains taxation, you do not pay tax until you sell the investment and thus realize the gain—however, dividends and interest are always taxed in the year they are paid out.

Tax rules for investing can be complex and depend on your specific situation. Therefore, consult an accountant or tax advisor before developing your investment strategy.

Returns at Stensdal

If you invest in commercial real estate, your return typically consists of the ongoing rental income from your tenants and any appreciation in the property’s value. At Stensdal, we focus on both aspects: we ensure stable rental income through long-term partnerships with reliable tenants, and we actively work to develop and maintain our properties so that they retain and increase their value over time.

Would you like to learn more about the returns on a specific real estate investment? Take a look at our real estate portfolio, or read more about what a real estate investor typically looks for when evaluating returns.

Frequently Asked Questions About Returns

What is the difference between return and dividend?

Return is the total gain or loss on an investment. A dividend is the portion of the return that is paid out to you—in other words, it is not something you receive in addition to the return, but rather a part of it.

How do I calculate my return?

Subtract your initial investment from the current value, and divide the result by the initial investment. Multiply by 100 to get the return as a percentage.

Do I have to pay taxes on my returns?

Yes. The tax rate depends on how and where you invest—including whether the returns are taxed as stock income, capital gains, or through a stock savings account. Talk to an accountant or tax advisor about your specific situation.

Can you make a living as a real estate investor?

Yes—but that requires a portfolio of a certain size and professional management. As a rule of thumb, a portfolio must have a total net operating profit of at least 1–2 million DKK per year to be able to live off it entirely.

 

Søren Stensdal

Søren is the CEO and founder of Stensdal, with over 40 years of experience in the real estate industry. From his background in banking to becoming an independent commercial real estate broker and developer in 1991, he brings a strategic and commercial big-picture perspective to everything related to real estate development and investment.

Read more about Søren