Calculating original cost of share purchase after dividends?

philng

How do you calculate original cost of purchase for a share when dividend received?
Example purchase £10000 of shares at £1 and receive 5p dividend the original purchase price per share is now 95p
But if you receive the 5p in shares instead at say the same £1 a share so 500 extra shares and now a total share holding of 10500
In the 2nd case what is the revised purchase price of the original shares?
Are there any apps that work this out for you or excel spreadsheets so I can monitor my holdings true original cost after receipt of dividends?

Linton

Its rather more usual and helpful to regard dividends as part of the investment return, not as a rebate on the purchase price. What is your objective in doing otherwise?

philng

Because it is part of the overall return how can I reflect that in my portfolio?

Linton

Keep a record of dividends for each investment.

If you want accounting purity, especially if you buy and sell in the meantime, you are into complex calculations. Cash now is worth less than cash a year ago because you could have done something else with it and got some interest. However if you want to compare one investment with another and you dont have buys and sells in the meantime, the following simplistic calculation is probably good enough...

Say you invest £1000 on £1 shares. After 10 years your 1000 shares are worth £2000 and you have gained £500 in dividends giving a profit of £1500. Your average annual return is (2500/1000)^(1/10)-1= 9.6%. One problem with your approach is that it artificially inflates % returns: once dividends have fully paid off the purchase price it suggests you are getting an infinite return.

Linton

You could also look at the Excel XIRR function. Again you would need dividend info with dates.

sabretoothtigger

Shares received in payment when holding have zero cost when you write it into the portfolio. Eventually that will show in the cost of the share as obviously you received more for the same money

Apodemus

sabretoothtigger wrote: »

Shares received in payment when holding have zero cost when you write it into the portfolio. Eventually that will show in the cost of the share as obviously you received more for the same money

But it is important to retain a note of the additional value of the dividend shares, so that you can calculate the overall capital gain at disposal. In this case, the total purchase price of the holding becomes the initial purchase price plus the dividend.

Instead of thinking of these as free extra shares, it might be better to consider that you received a cash dividend and were given an opportunity to buy additional shares without incurring dealing charges. The dividend falls under income tax rules and the additional shares under capital gains rules.

philng

So in a portfolio of say 30 shares the only way to show the true performance comparatively is to reduce the purchase price by each dividend receipt otherwise a higher dividend paying share will not reflect its true performance gain as say a lower dividend paying share.
The dividend is all part of the return and some shares will pay no dividend some low and some high and some maybe more focused on capital growth than income.
What I want to be able to do is fairly show this in my portfolio so all return can be accounted for from original purchase date?

bigadaj

There's no point reducing any share price, you just need to record prices when purchased, and then dividends when paid, and if they purchase shares the pride at that time.

It's a long winded methodology but keeping this record and using an xirr function with excel is one way of giving you an accurate return.

philng

So a share that has paid a 5p dividend in 12 months since purchase but no growth in share price is the same return as a share that pays no dividend but 5p share increase.
I have a full portfolio set up on iii and want to be able to reflect the accurate return for both scenarios. Without making an adjustment for the dividend scenario the 2nd example would show a 5% increase but the first example would show 0% return.

bigadaj

Yes, I don't think you can do that on the portfolio management tools, certainly couldn't work out how to do it on my trustnet portfolio.

You need to keep things separate by presumably using it in excel or open office, you need to keep these figures separate if they are unwrapped investments to determine whether you are liable for capital gains tax and potentially tax on dividends received.