How to Account for Reinvested Dividends When Calculating a Portfolio Return

Corporations pay dividends to shareholders, sometimes at fixed intervals and sometimes with special one-time dividends. Often, if you have no immediate need for the money, it's easiest to simply reinvest the dividends to buy more shares of the stock. In fact, some companies have automatic dividend reinvestment programs that make this even easier. When figuring your portfolio return, you should include the value of the stock purchased with reinvested dividends, which represent a return on your investment.

Calculate your cost for the portfolio by multiplying the number of shares you purchased by the price you paid per share. For example, if you purchased 150 shares at $61 per share, you paid $9,150.

Calculate the present value of your portfolio by multiplying the number of shares you own, including shares purchased through dividend reinvestment. For example, if you now own 165 shares worth $63 per share, the present value of the portfolio is $10,395.

Divide the present value of the portfolio by the cost of the original shares to find the ratio of the present value to the original cost. In this example, divide $10,395 by $9,150 to get 1.136. Subtract 1 from the result to calculate the overall return expressed as a decimal. In this example, subtract 1 from 1.136 to get 0.136.

Multiply the overall return expressed as a decimal by 100 to find the overall return expressed as a percentage. In this example, multiple 0.136 by 100 to find the overall return is 13.6 percent. Divide 1 by the number of years you held the portfolio. In this example, if you held the portfolio for two years, divide 1 by 2 to get 0.5.

Raise the ratio of the present value to the original cost to the power of 1 divided by the number of years you held the portfolio. In this example, raise 1.136 to the power of 0.5 to get 1.0658.

Subtract 1 from the result to calculate your annual return on your portfolio, including reinvested dividends. Finishing the example, subtract 1 from 1.0658 to get 0.0658, meaning your average annual portfolio return is about 6.58 percent.