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How to calculate stock returns

How to calculate stock returns?

Level 1: calculating stock returns based on share price increase or decrease only. I bought some shares in telecom company Verizon 5 years ago at $45 per share, which are currently trading for $60 per share. The return I made on just the increase of the share price is the difference between the current share price and the share price at the time of purchase in the numerator, divided by the share price at the time of purchase in the denominator. $60.04 minus $45.23, divided by $45.23. This equates to $14.81 divided by $45.23, which is a 33% share price gain in 5 years. If you translate that to annual returns in a very simple way (by dividing the 33% by 5), you get to around 6.5% return per year.

0:00 Share price gains
1:15 Share price gains plus dividends
2:40 Share price gains plus dividends reinvested
5:56 Share price gains + DRIP – cost/fees

This works OK and is actually the final answer for stocks that do not pay a dividend, but this stock return calculation does not provide a full picture in case the company does pay a dividend (like Verizon).

In level 2 we calculate the #stockreturns based on both the #shareprice increase or decrease, as well as dividends received. The advantage is that this allows the performance of shares to be compared even though some of the shares may have a high growth and low dividends and others may have low growth and high dividends.

The updated formula for calculating the stock return is the share price change plus the dividends in the numerator, divided by the share price at the time of purchase in the denominator. $14.81 plus $11.86, divided by $45.23. This is $26.67 divided by $45.23, or 59% total gain in 5 years. Once again dividing this total return by 5, this equates to around 12% per year. A much more complete picture of stock returns versus just focusing on the annual 6.5% share price gain!

We can further improve the accuracy of our calculation, by looking at the share price gain, and dividends reinvested. This requires either a more extended spreadsheet, or the use of an online tool. If you type “total return on a stock including reinvestment calculator” into a search engine, you will get to a screen like this where you can input the ticker symbol (in our case VZ for Verizon), the starting amount (in our case 1 share bought at $45.23), and the starting and ending dates of the period for which you want to calculate total shareholder returns. By the way, DRIP stands for dividend reinvestment plan: the investor’s dividends are directly reinvested in the underlying equity, generating additional returns. The output from the online tool is a graph like this, plus a number here at the bottom left stating what the value of the share price plus reinvested dividends is at the end of the time period. Our updated formula for the stock return calculation is final value minus starting value, divided by starting value. $76.92 minus $45.23, divided by $45.23. This is $31.69 divided by $45.23, or 70% gain in 5 years. Dividing this on a “straight-line” basis, this equates to 14% return per year.

So far, the return went up for every additional level that I covered: from 33% in 5 years based on share price appreciation, to 59% in 5 years based on share price change plus dividends, to 70% based on share price change plus reinvested dividends. What will happen in level 4? Does it get any better than this? No, it doesn’t, as in level 4 we take transaction cost and service fees into account, which lower the total returns. You incurred transaction cost when you bought the shares, and if you want to calculate your total returns, should also take into account transaction cost if you sell the shares at the end of the 5 year period. On top of that, during the 5 years that you were holding the shares, your bank or broker has probably charged you a service fee as a percentage of the value of your portfolio. These transaction costs and service fees depends on the broker and plan you are on, so I am not inserting any actual numbers into the calculation here, but I guess you get the point!

Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

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