How to calculate returns from Stocks including dividends

Published: August 4, 2015 at 9:01 am

Last Updated on

This post describes how one can calculate returns from stock investments including the declared dividends.  There is a lot of confusion about this calculation with regard to how the dividend should be treated.

In this post, return refers to XIRR, that is the personal rate of return. See this for more details:  What is XIRR?

The following is the universally accepted definition of computing return from cash flow:

  1. Only actions by the investor should be  shown as inflow (investment) and outflow(redemption).
  2. Actions by the instrument – dividends, bonuses, splits – should not be accounted for directly in the cash flow but must reflect only in the stock price or NAV.
  3. A dividend (be it stock or mutual fund) should always be treated as reinvested, even if the investor chooses not to actually reinvest it! That is the dividend will be accounted for in the price or NAV and should not show up as cash flow entry.
  4. Wrt mutual funds, SEBI has mandated the above method for calculation.  To put it simply, an equity mutual fund with dividend reinvestment option will have the same return as the grown option (ignoring the small security transaction tax). Not true for debt mutual funds due to the dividend distribution tax.

Some authors think it is ‘okay’ to assume dividends are paid out.  This could lead to significant differences in the way returns are reported.

I have earlier written a rather heavy post on the subject: How to calculate returns from Dividend Mutual Funds 

The logic for stocks is the same. In this post, I would like to present a much simpler (hopefully!) illustration.

If you want a calculator for calculating stock returns including dividends, leave a comment.

Let us say, you purchased Rs. 5000 worth of a stock each month.

You start in January. In February, the stock splits. In March, the company declares a dividend. In April, You receive bonus shares.

If you wish to calculate the XIRR for the above scenario, it would be easy  if the stock price is adjusted for bonuses and splits.

It would be terrific if you could get the stock price adjusted for splits, bonuses and dividends. I cannot find such a source.

Money control adjusts for splits and bonuses and not for dividends.  Yahoo Finance adjusts for splits and dividends and not bonuses.  Historical stock price downloaders from Money Control and Yahoo Finance are available.

Therefore, it is  easier to use Moneycontrol historical data which is adjusted for splits and bonuses and account for dividends separately.

Use of adjusted stock price implies that the price used in XIRR calculation could be different  from our actual purchase price.

The actual stock price can be used and corporate action accounted for separately, but I think it is easier from the point of view of an automated calculator to use adjusted price.

So, in Jan (of 2015), the adjusted stock price is Rs. 1000. I get 5 shares with my investment of Rs. 5000.

In February, the adjusted price is 1010. With my investment of Rs. 5000, I get 4.95 shares. So I now hold a total of 9.95 shares. (please ignore occurrence of fractional shares)

The stock split has been accounted for retrospectively using the adjusted price.

In March,  the adjusted price is 1020. The company declares a dividend of Rs. 10 per share.

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So the total dividend received is 10 x 9.95 = Rs. 99.5

This is assumed to be reinvested at the adjusted ex- dividend price. Ex-dividend price is the price before dividend declaration minus the dividend rate.  In this case it is,  1020- 10 = 1010.

The reinvestment due to the dividend is, 99.5/1010 = 0.1 shares.

Assuming we buy Rs. 5000 worth of shares on the same day, additional 5000/1010 = 4.95 shares are purchased.

So no of shares deemed to be purchased in March  = 0.1+ 4.95 ~ 5.

So total number of shares held up to March = 9.95 +5 = 14.95 shares.

In April, I would like to calculate XIRR before making an investment. XIRR for short durations can fluctuate wildly. This is only for illustration.

The price now is Rs. 1030.

So the total value that will be used for calculation is Rs. 1030 x 14.95  = Rs. 15,398.5

So the cash flow would lo0k like this

01-01-2015      -5000

01-02-2015      -5000

01-03-2015      -5000

01-4-2015          15,398.95

Here the minus stands for investment.  So XIRR is 17.25%.  In Excel, we use =XIRR(list of values, list of dates)

Notice that the dividend declaration appears in the final value only. It is not shown as  a receipt.

Please let me know if this example makes sense to you. Treating dividends as reinvested is a convention. That need not make sense! 🙂

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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
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