When you invest in stock that pays a dividend, you're buying into two income streams: capital appreciation of the shares and dividend income. There is no guarantee that the stock's price will go up after you buy it. On the other hand, if you invest in a stable company, you'll enjoy periodic dividend income as you wait for the shares to rise in value. Because the dividend represents a return on your investment, you must factor it in when calculating the performance of the stock.
Calculate the cost basis -- the original price -- of the shares. For income tax purposes, this is also the amount you'll report to the IRS when figuring if you had a capital gain or loss when you sell the shares. Let's say you purchased the shares when the stock traded at $25 per share.
Select a holding period for evaluating the stock's performance. For example, If you purchased the stock at June 30, you could select Dec.31 of that year for a closing date, which makes a six-month holding period. At the end of the year, the stock's closing price was $37.
Determine how many dividend payments you received over the holding period. Suppose you received two dividend payments, of 40 cents in the third and fourth quarters. Add your dividend payments. In this case, the total dividend payment you received was 80 cents over the holding period.
Add the dividend payments to the stock price at the end of the holding period. Let's say the stock closed at $37 at Dec. 31. With the dividends, the stock's total return is $37.80.
Calculate the total return by dividing the ending stock price by your cost basis. In this case, the stock's return is 51 percent, or $37.80 divided by $25.
- You may hear the term "dividend yield" when it comes to stock investing. The dividend yield is the annual dividend payment divided by the current stock price. Dividend yield is useful, but is subject to the fluctuations of the stock price. For example, the yield of a stock that declines in price and that pays the same annual dividend as another company will always look better. But in this case, the decline in stock price should be a red flag that may indicate trouble.
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