Any time you invest in something, you should figure our your return on investment (ROI). Your return on investment shows you how long it will take you to recoup your initial investment, as well as provide you with a basis of comparison moving forward. Figuring your ROI is an important part of doing your homework and deciding whether or not to continue with an investment. This is true of dividend stocks.
How to Figure Your ROI on Dividend Stocks
Members Only in dividend stocks, you need to figure your ROI based on the appreciation in the stock price, as well as what you earning in dividends. Some people neglect to consider these two items together. When you are focused on the dividends you are earning, and your income stream, you tend to forget that you have bought a stock, and that stock is affected by the market, gaining or losing in price independent of what you are being paid as a dividend.
Let’s say that you purchase a stock for $50 a share. The dividend yield is 4%, so you end up with $2 a year. Over the course of the year, your stock improves in price by $8, bringing the total to $58. Add your $2 dividend, and you find that your total is $60. Now, you haven’t earned $60 in profit; you have to subtract the original share price from your total. Your profit is actually $10. You divided that $10 by your initial investment of $50 to get 0.2. Multiply that by 100 to get a percentage: 20%.
Now that you know your ROI, it is time to use that information to determine how long it will take you to recoup your original $50 investment. You simply divide 100 by 20 to get 5. It will take you approximately five years to recover your initial investment when you consider the dividend plus the gain in stock price.
Things to Be Aware Of
Of course, there are items that can change the way you earn a return. Stock prices may not always go up. Indeed, three years in, the price might drop. Additionally, the company might cut dividends, changing your ROI. You can refigure your ROI at the end of the year if you are interested in tracking trends in your dividend stock. If it appears that the ROI is diminishing at a fairly regular rate, it might be worth it to consider dropping the stock. Figure out why the ROI is falling. If it has to do with broad economic issues, it might be worth it to hold on. However, if it appears that other problems are surfacing with the company, it might be time to sell and move on.