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should you include dividends when calculating your investment return?

3905 Views 4 Replies 4 Participants Last post by  leslie
i'm just wondering if i should be treating dividends as part of my overall return? i've got a simple lazy portfolio with TD e-series and was wondering if it is normal to just calculate returns based on the market & book values OR should i take into account the dividends that have been automatically re-invested?
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You need to start keeping track of your holding. List of spreadsheets.

Your portfolio's annual return is the change in its market value (including cash) between beginning and end of year, adjusted for draws/savings. You do not measure the dividends separately because they will either still be sitting there as cash, or they will have been reinvested in some stock that's market value is included. For that reason you always benchmark against an index's TOTAL RETURN, not the quoted % you see in the press. The amount of your portfolio's total return attributable to dividends is simply the total of all dividends received as a percent of of the total return.

Most people do not measure annualized returns for individual holdings. They measure the cumulative return. If you really must measure the annual return of individual stocks, there is a different method depending on where the dividends are reinvested.

If your broker auto-reinvests distributions into more shares of the same security, the value of the distribution now shows as the market value of the additional shares. Your year's return is the difference between the market value of the shares (different number) between beginning and end of year. You do not include the dividends in the numerator.

If the dividend income was used to buy other stuff, simply start a new calculation for that other stuff. Your year's income from the original shares equals the sum of the dividends received plus the change in market value of the shares. Although some people on this site think you should add the income from that second security to the calculation of the original security, this is WAY overkill.

But really it is not necessary to keep really accurate accounts of returns from individual issues. It is your portfolio total that counts. KISS.
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