Stock Return Minus Dividends

[marko]

We live mostly on dividends and I'm trying to see how my stocks/funds are growing despite my taking out all the annual dividends.

Stocks/Funds report "Total Return" which includes dividends and--in the case of funds--cap gains.

I'm trying to figure out the organic growth of a fund minus such payments.

So:
If a stock/fund has a 10 year annual return of 7.00% and has paid a dividend of 2% annually (assume it's the same each year), would the organic return be 5%? Or is it more complicated than that? Or, for the second time already today, am I looking at things the wrong way?

Or is the total return in fact the same as the organic return as the price drops with the dividend?

 

[Andre1969]

Good question. I did a google search, and it looks like the stock charts that most people reference do not include dividends. However, I think if you want to include dividends in your calculations, the term is "Total Return"?

However, when they plot out the price of a stock over a long term, it looks like they take the splits into account, by reducing the stock value before the split. For instance, I recall first buying Apple (AAPL) stock for around $88.60 per share, in early 2005. But, it did a 2:1 split soon after. And at some point it also did a 7:1 split. So now, if I look at an old plot, it will show AAPL going for around $6/sh at the time I bought it.

 

[bobandsherry]

A simple calc. Take your purchase price, subtract from today's price. Then take that amount and divide by purchase price. That's overall return. If you want on annualized basis, take the return %, divide by # of days held then times 365.

 

[gauss]

A simple calc. Take your purchase price, subtract from today's price. Then take that amount and divide by purchase price. That's overall return. If you want on annualized basis, take the return %, divide by # of days held then times 365.

Might be close over a short time period, but I believe that over a longer period of time, you really need to calculate a geometric average, not an arithmetic average to do this properly.

-gauss

 

[foxfirev5]

Since I'm likewise taking the dividends I simply look at the overall stock/fund balance vs some time in history. Since I reinvest Cap Gains the difference is my personal capital gain.
FWIW, I'm good with the ballpark figures and don't let the minutia get to me.

 

[OldShooter]

... FWIW, I'm good with the ballpark figures and don't let the minutia get to me.

Well, yes, but "minutia" in investment returns is a small number of basis points. Giving up 1% in return x 10 years x $1M is $100K. So you have to watch fairly carefully to understand what might be happening.

More generally it is amazing to me the number of people who don't understand that total return is the number to pay attention to. And amazing again that it can be a difficult number to find, particularly when looking at market indexes. Nominal return is close to meaningless.

 

[foxfirev5]

Well, yes, but "minutia" in investment returns is a small number of basis points. Giving up 1% in return x 10 years x $1M is $100K. So you have to watch fairly carefully to understand what might be happening.

More generally it is amazing to me the number of people who don't understand that total return is the number to pay attention to. And amazing again that it can be a difficult number to find, particularly when looking at market indexes. Nominal return is close to meaningless."

TR vs Dividends I get it. Please guarantee me the recent returns and I'll be all over it. After 40+ years I've got enough and happy to get on the dividend bandwagon. A point or two of TR has no impact on my lifestyle.

 

[marko]

Since I'm likewise taking the dividends I simply look at the overall stock/fund balance vs some time in history. Since I reinvest Cap Gains the difference is my personal capital gain.
FWIW, I'm good with the ballpark figures and don't let the minutia get to me.

OP here.
Here is what I'm trying to understand:

The stated total return includes dividends.

If I take the full 2% dividend that a fund is paying, by how much is the fund growing on it's own? I want to make sure that the NAV is at least keeping up with inflation and even better, growing.

So if I'm taking 2% and the fund is growing another 5% does that make my total return 7%?

 

[OldShooter]

... A point or two of TR has no impact on my lifestyle.

Same story for us. We have more than we will ever spend. But we are interested in maximizing our estate for kids' trusts, charity, etc. So we pay attention. It's optional, though.

... So if I'm taking 2% and the fund is growing another 5% does that make my total return 7%?

Yup. At the end of a given year. The calculation gets a little messier over multiple years because the div % of the stock price is always moving around and because of compounding. But you have the basic concept.

 

[foxfirev5]

Same story for us. We have more than we will ever spend. But we are interested in maximizing our estate for kids' trusts, charity, etc. So we pay attention. It's optional, though.

I understand. Not trying to be difficult but I have a tough time determining what actions will achieve the goal. DW feels as you do and takes her path. I'm a divy guy. Either way I fail to see how past performance will indicate future results. Falling interest rates are just the start. Just because I have position does not mean that I'm an ignorant buffoon that does not pay attention. Time will tell.

 

[bobandsherry]

Might be close over a short time period, but I believe that over a longer period of time, you really need to calculate a geometric average, not an arithmetic average to do this properly.

-gauss

Educate me on how that method would differ for a buy and hold security where dividends are being stripped out and paid in cash. I'll wait for my answer.

 

[bobandsherry]

So if I'm taking 2% and the fund is growing another 5% does that make my total return 7%?

If you want a rough ballpark estimate, then sure. But over a longer period of time, has the dividend remained the same? If dividend stays the same and there's price appreciation then the actual dividend % isn't going to be consistent.

 

[OldShooter]

I understand. Not trying to be difficult but I have a tough time determining what actions will achieve the goal. DW feels as you do and takes her path. I'm a divy guy. Either way I fail to see how past performance will indicate future results. Falling interest rates are just the start. Just because I have position does not mean that I'm an ignorant buffoon that does not pay attention. Time will tell.

Agreed. Past performance is useless in predicting results. What can matter is portfolio design.

You probably won't like this but hang in there: A portfolio that emphasizes dividend-paying stocks is probably not going to beat the overall market on a long-term basis. If it did/does, then those stocks' prices would be bid up and from that point its advantage disappears. A portfolio that emphasizes dividend-paying stocks is, however, likely to underperform on a total return basis simply because dividend-seekers are willing to pay a little more for stocks that give them what they want. Said another way, equal performance is your ceiling and underperformance is a real risk.

So the portfolio design problem is to get as close as possible to market performance. To do that one has to look not just at dividend yield but also at total return. I think if you ignore total return you are pretty much guaranteed to underperform.

 

[foxfirev5]

Time will tell. I'm not worried.

 

[marko]

Yes, I understand that. My question assumed a constant dividend rate, as unrealistic as that might be. Just trying to understand it in concept first.

If you want a rough ballpark estimate, then sure. But over a longer period of time, has the dividend remained the same? If dividend stays the same and there's price appreciation then the actual dividend % isn't going to be consistent.

 

[pb4uski]

End of period price per share/Beginning of period price per share -1 = return for the period.... then annualize if you want using Excel rate function.

 

[marko]

I may just be way out in the weeds (I know I can be quite dense sometimes) but let me try again:
If a fund has a total return of 7% and paid a dividend of 2% ( included in the TR) is the fund's true performance 5% or 7%?
Again, I may not even be asking the question correctly.
I do have a history here of being an idiot sometimes...DW says so.

End of period price per share/Beginning of period price per share -1 = return for the period.... then annualize if you want using Excel rate function.

 

[target2019]

Marko, what is the fund, date purchased, shares purchased? That would make things much simpler to explain.

 

[Beststash]

I use this DRIP calc to see the impact of dividends for individual stocks. I've never check it for accuracy.


https://www.dividendchannel.com/drip-returns-calculator/

 

[OldShooter]

... the fund's true performance ...

Let me try something a little different, possibly ridiculous. If ridiculous I apologize in advance.

Assume you are offered a little machine called a MoneyMachine. The MoneyMachine spits out some coins every three months. You like the idea and you buy it.

You are a patient person, so you put your MoneyMachine in the hall closet and leave the door closed for ten years.

At the end of ten years, you open the door, pocket the coins and sell the money machine. The total of the money you net, less your initial investment, is your total return from the MoneyMachine investment. You might choose to call it "true performance" though that is not a common term.

Now lets throw some numbers at it. Assume the MoneyMachine cost you $1000 and at the end of the ten years you were able to sell it for $1100. In addition, you found a pile of coins in the closet totaling $400. So you calculate your total return as the $400 in coins plus the $100 you made on the MoneyMachine sale, so $500 or 50%. Annualized, it is 4.14%. ($1,500/$1,000 to the one-tenth power).

The $100 you made selling the MoneyMachine is nominal return. This is not a number you are very interested in because it is meaningless. It's like if you asked me "How much does that hippopotamus weigh?" and I said, "Well, the head weighs 500#." That is not useful information.

 

[marko]

Marko, what is the fund, date purchased, shares purchased? That would make things much simpler to explain.

Ok. For example:

TRRGX (TRPrice 2015 fund)
Purchase date 1/1/17 @ $14.18 2,000 shares
Price at 12/31/17 $15.97
Dividend 2.06%

 

[marko]

Assume the MoneyMachine cost you $1000 and at the end of the ten years you were able to sell it for $1100. In addition, you found a pile of coins in the closet totaling $400. So you calculate your total return as the $400 in coins plus the $100 you made on the MoneyMachine sale, so $500 or 50%. Annualized, it is 4.14%. ($1,500/$1,000 to the one-tenth power).

The $100 you made selling the MoneyMachine is nominal return. This is not a number you are very interested in because it is meaningless. It's like if you asked me "How much does that hippopotamus weigh?" and I said, "Well, the head weighs 500#." That is not useful information.

Not so ridiculous! Thanks.
DW is right....I am quite dense sometimes. Numbers is hard.

 

[bobandsherry]

Ok. For example:



TRRGX (TRPrice 2015 fund)

Purchase date 1/1/17 @ $14.18 2,000 shares

Price at 12/31/17 $15.97

Dividend 2.06%

1/1/1714.18
12/13/1715.97
Change1.79
Return12.62%

With dividend it would be 14.68%

 

[marko]

THIS answers my question! Thanks. Frustrated that I couldn't make my query clearer

.

1/1/1714.18
12/13/1715.97
Change1.79
Return12.62%

With dividend it would be 14.68%