Calculating total return when dividends are reinvested

28th Sep '17 by Nicowilson

10 comments 11657 reads

I'd like to make sure that I'm properly calculating the return on a holding when dividends are reinvested. Many portfolio management apps/spreadsheets don't allow for the purchase of additional shares from the dividends received and instead assume that these additional shares are funded by an additional input of cash, and so I'm building a spreadsheet.

Imagine that I purchased 550 shares in ABC Plc in May 2015, and then a further 500 shares in January 2016. All dividends were reinvested.

I've categorised the purchases into those funded by Cash, and those funded by dividend reinvestment (DRIP).

The total return is calculated as:

((Current Value of Shares + Dividends Received - Cost of Reinvestment) - Original Cash Investment) / Original Cash Investment

Here's a link to the spreadsheet: Dropbox link

I am assuming that I could apply this across a complete portfolio by consolidating the values for each holding in to the formula.

Have I got this right?

Thanks

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Blissgull

28th Sep '17

If all dividends have been reinvested then I can't see the point of the two expressions " Dividends Received - Cost of Reinvestment." These two expressions should cancel each other out assuming 100% dividend reinvestment. The current value of the shares should already reflect the reinvestment of dividends.

Nicowilson

Sorry - I should have been cleared. There isn't 100% dividend reinvestment.

GrahamF

Given that one has to purchase a whole number of shares, there will often be a little dividend left over as retained cash.

roddy10

29th Sep '17

@Nicowilson - you have raised one of my big bugbears. Even institutional grade software and systems do not cope well with dividend re-investment. Couple of points:
1. The dates matter - sometimes there is a lag between a stock going ex-dividend, the cash getting to your account and being able to redeploy the cash to purchase new shares (unless you keep some cash float in your account or the broker allows you some margin). The lag might be as simple as the difference between the open price on the ex-dividend date and you being filled 30 mins later but can sometimes end up being a couple of days.
2. Taxes matter - especially if you trade non-UK stocks and the rules re withholding taxes in different countries, and reclaiming taxes is a nightmare.
3. Currencies sometimes matter - I have known some stocks listed e.g. in the UK where the dividend is paid in either another currency or paid in GBP but based on e.g. a USD payout.

Notwithstanding all of the above I think you are on the right track. I will endeavour to have a look at your spreadsheet over the weekend.

Yes. You're absolutely right. This is why the formula includes the surplus of cash after the reinvestment has taken place.

sharw

fwiw I do my own spreadsheet monitor of total return. The four essential columns are A cost of shares, B current value = bid price x number of shares - dealing cost if sold, C cash received (dividends, capital reorganisations) and D total return = B+C-A. (Other columns are fancy things like %).

If I received a dividend of the type you are talking about the number of new shares would be added to the total number in B, and cash to C and any dealing cost to A.

jonesj

I deliberately opted out of DRIP options with my brokers several years ago, as all the small purchases were clogging up my trade history. These were making any form of performance calculation more difficult. Also, for non-tax-sheltered accounts, calculating capital gains also required more effort.

My current approach is to periodically purchase something with the dividend cash.

lightningtiger

Weather you buy extra shares or have them re invested to increase the number of shares, it all ads up to a total number of shares held and simply multiply by the bid price.Hargreaves does this automatically, but my main problem is that I have one US share that does not give the right figure after close of business. I have contacted them twice about this and told "It is a grey area"
So tonight, end of September trading , it makes a difference of £797. When trading gets going on Monday again it rectifies itself again which I find irritating to say the least..
I let all the dividends get paid into the bank and then use cash to buy more shares with every 2 or 3 months , that way you can easily see what dividends have come from which company and when they were paid.and a record of how much was paid.Simple.

cig

1st Oct '17

There's no easy true answer to that question unfortunately. Your formula misses the time discounting component for instance (when dividends are paid).

Personally, I use the Internal Rate of Return.

To do that, I have a program that processes broker records to flatten all the cash flows associated with a stock -- purchases and disposals, all corporate actions, including dividends -- down to a list of (date, cash in or out) pairs. If I still hold the stock, I add a simulated "sell all" event (today, + shares * last-close-price) as the last item of the list. Then computing the IRR can be done using your favourite software's built-in function (I use pandas, it's also in Excel and most other stat software).

3rd Oct '17

Thanks cig but do I need to worry about time discounting if all I'm after is a percentage gain/loss?

Calculating total return when dividends are reinvested

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Nicowilson

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