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
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?

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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Final Thoughts

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%