Some people invest in stocks for growth, others for dividends, but everyone invests in the market to make themselves richer. Just how much richer you become by holding onto your investment over a year can be slightly difficult to determine just by glancing at buy and sell prices. Because of this, investors use a measure called realized annual return to gauge a stock's performance, including fluctuations in market value and dividends paid to investors. It's an easy way to determine if your investment in stock is meeting its long-term goals.
Annual Realized Return
Realized annual return is merely how much money you gained or lost by holding onto a stock for a year. To calculate it, add the price at the end of the year to the amount of dividends you received and subtract the stock's price at the beginning of the year. Let's assume you bought a share of Widget Corp. stock at $10 a year ago, it's now worth $12.10 per share and it paid a 25-cent dividend. The realized annual return would be $12.10 plus 25 cents minus $10, or $2.35 per share.
Realized Rate of Return
Realized annual return is handy if you want to know the bottom line about how a single investment is contributing to your overall bottom line, but it's not much use when comparing stocks with different purchase prices. Growth of $2 on a stock you bought for $3 a share is phenomenal, although it's hardly noticeable on an investment where shares cost $450. Realized rate of return expresses annual returns as a percentage of your investment, making comparison easy. To calculate this, add the stock's ending price and dividends, subtract the beginning price and divide that total by the beginning price.
You can use realized annual rates of return to help gauge the performance of vastly different stocks, such as if you're considering purchasing a growth stock or a dividend stock based on the year's prior performance. Let's assume a growth stock had a year-end price of $15, paid a 10-cent dividend per share and opened the year at $11.75. Its realized annual rate of return would be about 28 percent. The calculation would be $15 plus 10 cents minus $11.75 divided by $11.75.
Now let's assume a dividend stock opened the year at $330 a share, closed at $342 a share and paid dividends of $18. Its realized annual rate of return would be about 9 percent. The calculation would be $342 plus $18 minus $330 divided by $330.
Realized Versus Expected Returns
Realized returns are best used to gauge a stock's performance in the past rather than to project earnings into the next year. To forecast a stock's potential returns for a year, refer to its expected return. This measure averages the stock's annual return rates over a given period and can be calculated by adding all rates of return for the period, divided by the number of rates of return added.
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