An investor buys 100 shares of a stock at $45 each. After one year, the stock appreciates by 20%, but the investor also receives a dividend of $2 per share. What is the investor's total return on investment after one year? - Parker Core Knowledge
Investment Return Breakdown: How Much Did the Investor Really Earn?
Investment Return Breakdown: How Much Did the Investor Really Earn?
When investing in stocks, understanding both capital appreciation and dividends is crucial to calculating your true return on investment (ROI). This article walks through a practical example of a one-year investment strategy: buying shares, watching them appreciate, and collecting dividends.
Understanding the Context
The Investment Setup
An investor purchases 100 shares of a stock at $45 per share. At the end of the year:
- The stock price increases by 20%
- The investor receives a $2 dividend per share
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Key Insights
Step 1: Calculate the Purchase Cost
Total initial investment =
100 shares × $45 = $4,500
Step 2: Calculate the Sale Proceeds After Appreciation
A 20% increase on the original price of $45 raises the share price to:
$45 × 1.20 = $54
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Selling 100 shares at $54 each yields:
100 × $54 = $5,400
Step 3: Calculate Total Dividend Income
The investor receives a $2 per share dividend, so total dividend income is:
100 shares × $2 = $200
Step 4: Compute Total Return
Total return = Sale proceeds + Dividends – Initial investment
= $5,400 + $200 – $4,500
= $1,100
Step 5: Calculate Percentage Return on Investment (ROI)
Return on investment (ROI) percentage is:
(Total Return / Initial Investment) × 100
= ($1,100 / $4,500) × 100
≈ 24.44%
