DEFINITION of Dividend-Adjusted Return
The dividend-adjusted return is a calculation of a stock's return that relies not only on capital appreciation but also the dividends that shareholders receive. This adjustment provides investors with a more accurate evaluation of the return of an income-producing security over a specified holding period.
BREAKING DOWN Dividend-Adjusted Return
An investor may begin calculating a simple return by taking the difference in market price and purchase price and dividing this by the purchase price. For example, say an investor purchases a share of Amazon (AMZN) on January 1, 2018, for $1,172.00 and sells it on July 11, 2018, for $1,755.00. The simple return would be ($1,755.00 - $1,172.00) / 1,172.00 = 49.74%. While Amazon does not presently pay dividends, if it did issue a $0.50/share quarterly dividend, and the investor received two distributions during the six months he held the stock, he could adjust his return by adding these to the sale price. His dividend-adjusted return would be ($1,756.00 - $1,172.00) / 1,172.00 = 49.83%.
Total return is a similar calculation, taking into account both the changes in market value and streams of income, expressed as a percentage (i.e., divided by the share price).
The dividend-adjusted close or adjusted closing price is another useful data point that takes into account any distributions or corporate actions that occurred between the previous day’s closing price and the next day’s opening price. The company’s price could shift, due to a stock split, for example. In a traditional stock split, a company divides its existing shares into multiple shares to boost liquidity. The most common split ratios are 2-for-1 or 3-for-1. This means that a stockholder will have two or three shares, respectively, for each share she or he previously held.
Dividend-Adjusted Return and Additional Return Calculations
There are many ways to calculate returns on securities, with the dividend-adjusted return and total return being just two helpful ways for those that pay dividends. The average return is the sum of a series of returns over certain time periods, divided by the total data points in the set. (Analysts may use the geometric mean return, time-weighted return, or money-weighted return for a more accurate figure.)