Online yield calculators are a handy tool for dividend investors

I tried to figure out how to calculate the compound annual growth rate of the stocks I put into a dividend reinvestment plan. The problem I’m having is deciding what to use as a seed. Should I use the initial purchase value of the shares? Or should I use the average purchase price, which would include the cost of shares purchased through the DRIP?

The easiest way to explain this is with an example.

Suppose you bought $ 10,000 of Royal Bank shares on October 15, 2011. You then listed them in the company’s DRIP, which allows you to reinvest every penny of your dividends because it supports purchases of fractions of shares. We’ll further assume that you haven’t brought in any new cash after that, other than reinvesting all of your dividends in additional stocks.

Ten years later, on October 15, 2021, your investment of $ 10,000 would have risen to approximately $ 40,500. Calculating your gross total return is simple: you would simply divide your $ 30,500 gain by your starting value of $ 10,000. The answer, 3.05, equals a total return of 305%. You don’t include the cost of your reinvested dividends in the starting value because that money didn’t come out of your pocket – it was paid out of Royal Bank profits and is part of your return.

Now, expressing that gross return as a compound annual growth rate takes a little more work. One method is to use an online annual rate of return calculator such as the one at www.dinkytown.net (look under “investment calculators”). If you enter the start and end dollar values ​​and their respective dates, the calculator will determine that the annualized return in our example is approximately 15%. (Make sure to set the “periodic deposit or withdrawal” to zero, as our example assumes that no money is added or withdrawn after the initial deposit.)

There is an even faster way to determine the annualized total return of a stock for a specific time period. If you are using the “Compound Return Calculator” at canadastockchannel.com, you just need to enter the ticker symbol and the start and end dates. There is no need to enter dollar amounts because whether you started with $ 1,000, $ 10,000 or $ 100,000, Royal Bank’s annualized return over the 10-year period in question would be the same. , 15%.

The calculator from canadastockchannel.com also allows you to compare the total annualized return of a stock to the S & P / TSX Composite Index. However, the index return does not include dividends, so this is not an apple-to-apple comparison. As a workaround, you can type XIC – the symbol for the iShares Core S & P / TSX Capped Composite Index ETF instead. XIC’s management expense ratio is only 0.06%, which makes it a good approximation of the total return of the S & P / TSX Composite Index, with dividends.

Again, the above analysis assumes that no money was added after the initial $ 10,000 investment, but real life isn’t always that simple. Sometimes people add money to a portfolio or sell stocks and withdraw the funds. In such cases, calculating the rate of return is more complicated. There are two main methods: “time-weighted return”, which controls the effects of cash inflows and outflows, and “money-weighted return”, which includes the impact of contributions and payments. performance withdrawals. For example, buying more Royal Bank shares just before a stock price surge would improve money-weighted return, but would not affect time-weighted return.

The details of each method are beyond the scope of this column, but when you see a total return for a mutual fund, exchange-traded fund, stock index, or individual stock, it is a weighted return within. the weather. The performance reports that advisors send to their clients use money-weighted returns. I recently checked my account performance with my discount broker, BMO InvestorLine, and they provide both metrics.

One more thing to keep in mind regarding your DRIP: although you don’t need to calculate your average purchase price to determine your return (based on the assumptions in our example), if you invest in an account non-registered, it is still important for tax purposes to track your dividend reinvestments. Each time you reinvest a dividend in your DRIP, the amount must be added to the adjusted cost base of your shares. This will reduce your capital gain (or increase your capital loss) when you eventually sell your shares. If you don’t increase your cost base, you could end up paying more taxes than you need to.

Email your questions to jheinzl@globeandmail.com. I am not able to respond personally to e-mails but I choose certain questions to answer in my column.

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