Dividend Payments and Total Return on Stock Investments (includes calculator)

By Stock Research Pro • December 24th, 2008

When measuring the performance of a stock investment, your total return is comprised of capital gains and any dividend distributions realized. Dividend income is, in fact, a critical consideration when calculating total return and it is unfortunate that many investors mistakenly believe that total return consists merely of any stock price appreciation during the period in which they hold the stock.

Historic Market Returns

From 1950 through 2004, the S&P 500 produced total returns that average to about 12% annually with dividend payments responsible for about 40% of that total return. Even so, stock dividends have fallen out of fashion in recent years as investors have focused more on growth and capital appreciation. In the current market, though, investors may be shifting back to the relative stability and the income offered through dividend stock investing.

Calculating Total Return

This total return calculation includes dividend distributions, if applicable, when determining the return of a stock. The calculation is as follows:

(Value of investment at the end of the year – Value of investment at beginning of the year) + Dividends / Value of investment at beginning of the year
= Total Return

In the calculation, total return accounts for both categories of return: income and capital appreciation. The capital appreciation accounts for any change in the stock price over the period the investment was held, while the dividend component accounts for any income received in the form of dividend payments during this same period.

Dividend Stocks in a Down Economy

In challenging economic times, stocks that offer a high yield through dividend distributions typically hold up better. If interest rates decrease (as they often do during a recession) the prices on these stocks may go up because high yields will attract income-oriented investors. If inflation becomes a concern, these companies will enjoy revenue and earnings increases and they may react by raising their dividends. This scenario makes dividend stocks a safer bet than bonds.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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