How to Calculate a Return on Investment
Calculating your return on investment on assets like stocks and certificates of deposit is actually a fairly easy process. The equation below shows how simple the ROI can be calculated, just by plugging in a few numbers.
ROI = (Total Gained – Cost) / Cost
Using the equation above, we can calculate the return on investment for a stock that is paying a quarterly dividend. If we purchased 25 shares of company ABC at $20 per share, our overall cost would equal $500.
Let’s assume that ABC is a dividend paying stock that pays $.25 each quarter to its shareholders for every 1 share they own. In order to calculate the total gained, we need to convert the quarterly dividend payments into an annual amount, which would equal $1.00 per share.
Since we owned 25 shares of the company, our income gained would equal $25 (25 shares * $1.00). Calculating the amount of dividend income is only the first part of figuring out the total gained. We also need to account for the current market value of 25 shares of stock.
Let’s assume that the stock saw a modest increase since our purchase and is now trading at $20.50 per share. Since we own 25 shares of the stock, our total estimated value of the position is $512.50. Adding in the dividend income that was earned over the past 12 months and our total gained on the investment equals $537.50
Our overall cost for owning the stock was $500. The investment cost and the investment gained can then be plugged into the equation above to calculate the true return on investment for owning the stock.
ROI = ($537.50 – $500) / $500
After crunching the numbers, we have calculated a 7.5% ROI from owning 25 shares of ABC over the past year.
For the purposes of this example, we won’t include any commission costs or fees.
The example above is a simply way to calculate the return on investment for a dividend stock. The equation can also be used for other income generating assets like savings accounts, certificates of deposit, and even real estate.