Ask Matt: Measuring the performance of investments

— -- Q: Should investors include dividends when they're comparing how stocks and other investments have performed?

A: It's not hard to decide which horse won at the track or which car won a race. Just stand at the finish line.

But when it comes to sizing up investments, and comparing them against each other, there's a bit more science that goes into it. The point you bring up, whether to include the value of dividends, is at the core of the issue.

There are many ways to measure how well an investment does. But most investors only need to concern themselves with the two primary ones: price appreciation and total return.

Price appreciation measures the total change in the value of the investment. For a stock or bond, the price appreciation would tell you how much more or less investors are willing to pay for the investment during a period of time. If a stock goes from $10 a share to $15 a share, the price appreciation is $5 a share.

On the other hand, the total return adds the value of dividends received to the total calculation. The total return of a stock would tell you how much investors earned by owning the investment. You get the price appreciation, plus the dividend, when considering total return.

Both price appreciation and total return are valuable ways to measure how well an investment is doing. But they measure different things.

Use price appreciation when you just want to get an idea of how investor interest in a stock or investment has changed over time. At the end of the year, investors will often look at lists of the best and worst stocks based on price appreciation. Price appreciation is a pure look at how much buying or selling was taking place in a stock, or other investment, without being distorted by dividend payments.

Total return, though, is best when you want to see how an investment actually did for investors. Sometimes a stock might be a dog, but is actually a good and profitable investment, due to a large and increasing dividend. A good dividend can make up for a lousy price appreciation. By including the value of dividends, investors can get a complete picture of how well an investment did. When evaluating nearly all fixed income investments, such as bonds, it's critical to include the value of dividends or interest payments since these are a key part of their return.

As you can see, measuring the performance of investments is a little nuanced. But depending on what you're trying to measure, you now have two tools to help you benchmark your investments.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz