To account for both compounding interest and differing holding periods, stockholder’s calculate their returns using the compound annual growth rate. This formula calculates the average annual return so that stockholders can easily compare the rate of return for various investments. The rate of return depends on the initial and final share values, dividends paid and the time the stockholder held the stock.
1. Add the dividends per share received by the stockholder to the stock’s final share price. For example, if the stock paid $2.89 in dividends and the final share price equals $39.40, add $2.89 to $39.40 to get $42.29.
2. Divide the result by the price at which the shareholder purchased the stock. In this example, if the shareholder purchased the stock at $38.50 per share, divide $42.29 by $38.50 to get 1.098441558.
3. Divide 1 by the number of years the stockholder invested in the stock. For example, if the shareholder held the stock for 6.25 years, divide 1 by 6.25 to get 0.16.
4. Use a scientific calculator to raise the Step 2 result to the power of the Step 3 result with exponents. In this example, raise 1.098441558 to the 0.16th power to get 1.015136195.
5. Subtract 1 from the result to find the compound annual growth rate. In this example, take away 1 from 1.015136195 to find the stockholder’s annual rate of return equals 0.015136195. That means the average annual rate of return is 1.51 percent.
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