Last Updated on December 29, 2021 at 6:15 pm
In this article, let us consider an example of calculating the annualized return from a stock investment after accounting for corporate actions like dividends and stock splits. We shall consider Colgate-Palmolive the oldest stock in my portfolio.
The calculator used in this illustration can also handle bonuses, buybacks and rights issues. It was first released as a beta version in Oct 2017 and is now being reworked for a fresh release to handle a full portfolio. The beta version is no longer available. We may recall that the CAGR (compounded annualized growth rate) is the measure of annualized return for single investments, the IRR (intern rate of return) for periodic investments and the XIRR (extended IRR) for investments on random dates.
The XIRR for Colgate-Palmolive in my portfolio is 19.7% between Oct 2014 to May 2021. The same purchase dates shall be used in this example, but only one stock is assumed to be purchased each time, resulting in an XIRR of 18%.
XIRR calculation for investments in growth mutual funds or a stock that does not offer dividends or announce any other corporate action is quite simple. Suppose
🔥Secure your future with our Robo-advisory tool trusted by over 3,500 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
Subscribe for money management solutions via email! (Link takes you to our email sign-up form) Join 32,000+ readers in our community.
👉 New Tool Alert! NaviPlan: A Privacy-Focused Multi-asset Tracker and Goal Planner 👈
- you buy 200 stocks of a company at Rs. 1000 a share on 1st Jan 2010
- You sell 25 of those stocks at Rs. 6000 a share on 7th July 2017 and
- calculate the XIRR as of 8th October 2017 (current market price is Rs. 6100). What is the annualized return?
To do this in Excel
Things become complicated with corporate actions. When a stock split or dividend is announced, it is an action by the instrument and not an action by the investor. For example, a dividend announced is money in our hands, but we did not initiate this money transfer the company did.
So while computing XIRR, we shall assume all dividends are reinvested on ex-date (date on which stock price has been adjusted to account for the latest dividend). This is this standard and universally accepted procedure to find out instrument returns. Also see: How to calculate returns from Dividend Mutual Funds and How to calculate returns from Stocks including dividends.
Many people make the mistake of assuming the dividend as a payout. This is certainly easier to do but is not universally accepted and can result in confusion. In this illustration, we have not accounted for dividend taxation, but this is quite simple to include.
Let us now continue with the above example. Now on 3rd March, a 3:2 split is announced. That is, since you hold 400 shares, half that number or 200 shares will be given to you. This is because
400 x (3/2) = 400 x (1.5) = 400 + 400 * 0.5 = 400 + 200.
So now, you will hold 600 shares. The price will drop by a factor of 1/.5. For example, if the price before the split is Rs. 500, it will drop to 500/1.5 = 333.33.
This will again not be reflected in the cash flow. Entires for a 1:1 bonus on 2nd Feb 2011 is also included with the same reasoning.
Now a dividend of Rs. 2 per share is announced on 4th April 2013. Regardless of what you do with the dividend, to find the XIRR of the instrument, it will be assumed to be reinvested at the ex-dividend market price. Ex-dividend price is the price before dividend declaration minus the dividend rate.
So the dividend amount of 2 x 600 = 1200 is used to buy imaginary stocks for the XIRR calculation at the ex-div market price of Rs. 200.
So 1200/500 gives 2.4 stocks. Making the total stocks held as 602.4.
Many investors are confused by this and say that this wrong. It is, however, important to recognise that a dividend is an action by the instrument and not by us. Reinvesting stock or mutual fund dividends at ex-price is the standard procedure adopted to calculate instrument XIRR. This is also the procedure recommended by SEBI for mutual funds with dividend option.
Colgate-Palmolive Stock Transactions
The transactions made are shown in the image below. This is a screenshot from the calculator. Several dividends and one stock split are included. For purchases and redemptions, the real-time market price can be included. For corporate actions, one can either use the opening price or closing price on the ex-date. The opening price is probably more accurate but will not make much difference to the XIRR over the long term.
The XIRR calculation is shown below. The reinvested dividends result in a small increase in shares (relevant only for the XIRR calculation). Also, notice that the splits and dividends are not shown as cashflow entires for XIRR.
With the current market price and date, the XIRR is computed to be 18%.
This calculation can also be extended to an entire portfolio of stocks. The user will have to accomplish two tasks to get XIRR for a particular stock or portfolio. Get all transactions from the demat account trade book and then automatically extract the price on ex-dates. The final version of the XIRR calculator will hopefully feature this.
We are on Google News
Use this button to add freefincal.com as a preferred personal finance source on Google News.
Explore 1,400+ videos on YouTube!
Subscribe to get posts via email!
Join 32,000+ readers and get free money management solutions delivered to your inbox! (Link takes you to our email sign-up form)Join our WhatsApp Channel
Explore our products
🔥Join our community of 9000+ users! 🔥- Use our Robo-advisory Tool to create a complete financial plan! More than 3,500 investors and advisors use this! Use the discount code robo25 for 20% off. Plan your retirement (early, normal, before, and after), plus non-recurring financial goals (such as child education) and recurring financial goals (such as holidays and appliance purchases). The tool helps anyone aged 18 to 80 plan for retirement, plus six non-recurring and four recurring financial goals, with a detailed cash flow summary.
- Our Flagship Course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market conditions! Watch the first lecture for free! One-time payment! No recurring fees! Lifelong access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
- Join the freefincal investor circle! An exclusive space for investors, advisors, fintech employees and students to access financial planning and insurance tools, mutual fund and stock analysis tools, coding strategies and Excel macros for data extraction. 750+ members are now part of our investor circle.
- Increase your income by getting people to pay for your skills! More than 900 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for side or passive income, we will show you how to do it by showcasing your skills and building a community that trusts and pays you. (Watch the 1st lecture for free). One-time payment! No recurring fees! Lifelong access to videos!
- Portfolio Tracker! Track your mutual funds and stock investments with our Google Sheet!
- We also publish monthly screeners for
Our Podcast: Let's Get Rich With Pattu
On Spotify: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! On Audible: Listen to the Let's Get Rich with Pattu Podcast
Listen to the Let's Get Rich With Pattu podcast on YouTube.
Now watch Let's Get Rich With Pattu தமிழில் (in Tamil)!About The Author
Dr M Pattabiraman giving a lecture
- Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras.
- He has over 14 years of experience publishing news analysis, research and financial product development. He has over 28 years of teaching and research experience. He is also a public speaker and keynote presenter.
- He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
- Connect with him via @pattufreefincal on X LinkedIn YouTube
- Pattabiraman has co-authored three print books.
This book helps you ask the right questions and find the right answers. It also includes nine online calculators to create custom solutions.
(2) Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want. 
Both the boy and girl versions of "Chinchu Gets a Superpower".
Most investor problems stem from a lack of poor decision-making. We made bad decisions and money mistakes when we started earning, and we spent years undoing them. Why should our children go through the same pain? What is this book about? As parents, what if we had to groom one ability in our children that matters not only for money management and investing but for every aspect of life? My answer: Sound decision-making. So, in this book, we meet Chinchu, who is about to turn 10. The story follows what he wants for his birthday and how his parents plan it, while also teaching him key ideas about decision-making and money management. What readers say! 
Feedback from a young reader after reading Chinchu Gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from a young age. The importance of money management and decision-making based on their wants and needs. Very nicely written in simple terms. - Arun.
About freefincal & its content policy
Freefincal is a News Media organisation dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact Information: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)Our publications
- Your Ultimate Guide to Travel. This is an in-depth exploration of vacation planning, including how to find affordable flights, budget accommodations, and practical travel tips. It also examines the benefits of travelling slowly, both financially and psychologically, with links to relevant web pages and guidance at every step. Get the PDF for Rs 300 (instant download)
- How to profit from content writing: Our ebook is for those interested in getting a side income via content writing. It is available at a 50% discount for Rs. 500 only!