On Calculating returns

JoeCrystal

Hello, been wondering as I glanced over my spreadsheet of my portfolio and I realised that the dividend do not get take into account in term of cost.

At the moment, the amount of dividends in cash get added onto the total value of my shares and combined value get worked out in calculating this company's return.

But only the total value of my shares is included within my total value of my portfolio when working out total return on my portfolio. Therefore, should the dividend reduce the total cost of my portfolio?

Cheers

Joe

anselld

Assuming you are trying to work out an equivalent annual % return, then you need to take timings into account for all incomes.
The XIRR function in Excel does this.
Put the purchase cost, dividends, and current value in a range against the relevant dates. (Costs -ve, incomes and current value +ve).
Then feed these ranges into the XIRR function and it will tell you the annual percentage return (IRR).

JoeCrystal

Thanks for replying but no, I am not trying to work out an equivalent annual % return. Thanks by the way! :j

What I am trying to do is basically consider if

1. I should reduce the total cost of portfolio by the dividend in cash when calculating total return of portfolio.
2. Or add the dividend onto the value of my holding when calculating total return of portfolio.
3. Lastly, do not include dividend or any incomes from my portfolio at all? (Not considering them at all when calculating return of company as well return of portfolio.)

I ask because using either 1 or 2 will produce two different returns. I just want to be totally sure on the return.

For example:

Assuming that cost of the investment is £1,000, in a year it is now currently worth £1,200. I would consider that as 20% increase
However, during the year, it pay a dividend of £100.

Option A: I can reduce the cost since it is cash. Cost: £900. Value: £1,200. This produce a return of 33%
Option B: I can add the dividend on top. Cost: £1,000. Value: £1,300. This produce a return of 30%

Thus, what is correct rate of return to use on overall portfolio?

Cheers

Joe

masonic

If you are trying to work out how well your portfolio is doing, then you need to take the dividends into account. Otherwise you'll be fooled into thinking companies with a high dividend and low growth are underperforming when that isn't necessarily the case.

anselld

I would say Option 2, if that is what you are trying to do.
However the point is that timing is also important. It is better to make 20% total return in 1 year than in 10 years. Hence why annual return on investment is a better performance measure.

Loughton_Monkey

If you do not take timing into account, then you are creating rather false figures.

Let me explain. If you invest £1,000 on a share the day before they go XD, and they pay £100 dividend two months later, then what do you do with the £100? Leave it in your share dealing account at no interest? If that's the case, then you overall share dealing account in 12 months will show £1,200 value plus £100 cash which is £1,300 and definitely 30% growth.

If, on the other hand, you got the dividend on day 364, then exactly the same applies. 30%.

HOWEVER, the first scenario is a pretty dim thing to do. You could have invested the £100 giving you a bigger return to bring you up to 31%/32% etc.

For your own purposes, you can obviously do what you want to do. But technically, it cannot be called "Return on Investment" in the true sense because any proper calculation must take into account the exact timing.

Just like if I always filled up my wife's car with petrol at my own expense (because I am nice), then she could choose to calculate the cost of running her car as basically road tax, repairs and insurance only. This might be 'true' for her, but the resulting figure is meaningless in comparison to any 'proper' calculation of the cost of running a car.

JoeCrystal

You gave me many foods for thoughts today.

As it is, I am still investing in more companies and in some case, been taking up right issues. At the moment, my return is just simple (Today value minus Cost) divided by Cost for all companies and portfolio. But I guess I will have to take timing into account somehow... :think:

cloud_dog

JoeCrystal wrote: »

I am not trying to work out an equivalent annual % return.

.....I just want to be totally sure on the return.

.....Thus, what is correct rate of return to use on overall portfolio?

An overall return on a portfolio is just the return on a portfolio at a point in time. It could be monthly or bi-annually (hope thats the right one) but more usually it is done annually.

Option 2 is the right thing to do.

I base my annual portfolio appraisal on the calendar year (01/01 to 31/12). I don't care when I recieved cash (divi's, interest etc) merely what is the return (growth) this year.

If I was constantly varying the time periods then yes timing would be far more important to working out an accurate return.

anselld

Yes, I would agree Option 2 is Ok if you take regular snapshots and compare the growth for each asset over the same period. That is still taking timing into account (approximately).

What does not really make sense is just to calculate an all-time return since purchase on each asset, because that will just tell you it is better to hold assets for a longer time.

JoeCrystal

Thanks for the replies. However, I am still uncertain sadly. I have eleven shares which I held just longer than one year while other five shares are held less than a year.

How can I work out annual return on the portfolio which increased it cost during the year like buying more shares or in some cases, taking up the right issues?

Cheers

Joe

anselld

If I am understanding "annual return" you want to be mean the total some of money you have made on each share over a year?

In which case it is simply....
Annual Return =
+ Share value now ( price * number held)
+ Cash proceeds received for any reason
- Share value a year ago ( price * number held)
- Cash added (spent) for any reason

For shares owned less than a year you will just assume share value a year ago = 0.


I personally still prefer XIRR as previously mentioned as it takes care of everything and you don't need to measure in whole year periods.