As a stock investor, you have two ways to profit from your investments: capital gains and dividends. Some investors invest primarily for capital gains or vise versa. If you want to start investing in stocks but you are unsure how dividends will play into your profit, you’ll need to know how it affects your rate of return.
What is a Rate of Return?
The rate of return, or ROR, is the gain or loss of an investment. It is expressed as a percentage determined by calculating the profit or loss against the initial price paid. The ROR is usually done in a one year period, but it can be calculated for any period of time. For any type of investment, the ROR should include all gains or losses it incurs.
Calculating a Rate of Return for Capital Gains
Let’s figure out the ROR for a stock that only earns capital gains. As an example, we will look at Apple (AAPL) for a one year ROR from March 11, 2011 to March 9, 2012. The price on March 11th, 2011 was $351.99. That is the approximate price you would have paid if you bought it on that date.
On March 9th, 2012, the price ends at $545.17. If you were able to sell it at that price, the difference would be $193.18, which is the capital gain. To calculate the ROR on this stock, divide the capital gain by the initial price paid:
- 193.18/351.99 = 54.88%
The simple rate of return is approximately 54.88%. Understand that this is an extremely high rate of return for a stock. Usually, an average rate of return in a good economy is about 8 to 12%.
Factoring in Dividends
Factoring in the dividends is very simple. All you have to do is add the amount you were paid in dividends to the capital gains. Apple doesn’t issue dividends, but let’s say in the past year it issued $20 per share worth of dividends. In this case, you’d add $20 to the $193.18 for a total return of $213.18. Now, you divide that amount by the initial price to get the adjusted rate of return.
- 213.18/351.99 = 60.56%
If you invested in a stock with this rate of return, good for you! You did well. Now that you know how dividends affect your rate of return, you can factor in the expected dividends of corporations while you analyze them to find good investments.
Ash is a writer for Ready to Buy Stocks. She specializes in buying stocks and other investment knowledge.
