How to incorporate dividends while calculating annual return of a Stock
When we say that the average annualized return of a stock XYZ over the last 5 yrs is 7%, how do we factor in dividends?
For example, let us say, if XYZ was at 100$, and at the end of year 1, it was 105 ;
at the end of year 2, it was 110 ;
at the end of year 3, it was 115 ;
at the end of year 4, it was 120 ;
at the end of year 5,it was 125.
And each quarter, it paid a dividend of 1$/share, then what will be the average annualized return?
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You simply add the dividend to the stock price when calculating its annual return.
So for year one, instead of
(105-100)/(100) = 5%
it would be
(105+4-100)/(100) = 9%
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