How to Figure the Expected Total Return on Common Stock
The total return of a stock is the sum total of dividends, capital appreciation and distributions. Stock splits are not part of the equation, as this is an accounting issue and does not reflect any underlying value. Expected total return reflects year-ahead projections for the underlying stock.
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Instructions
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Study and compute the rate of cash dividend increase for the past five years. Multiply the total of last year's payments by the annual rate of increase for the previous five years. This total represents the cash dividend component of the expected return.
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2
Study recent SEC 10K and 10Q reports (see Resources) and determine whether the company expects to spin off or sell any portion of its businesses and distribute the proceeds to shareholders. Divide the expected value by the number of shares outstanding.
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Estimate the expected stock price 1 year in advance. The stock price can be determined by brokerage firm recommendations, the rate of price appreciation for the last 10 years or from your own independent research.
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Add the total gains from the previous steps. Subtract the total from today's stock price. That is the gross amount of expected total return. Divide the gross amount of expected total return by today's stock price and get the percentage increase of total return.
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5
Use the total return method to rank stocks for purchase. Stocks in the same industry will usually have the same total return. Use total return as a trading vehicle. If a stock reaches its expected total return for the year in the first month of trading, review your calculations for mistakes or consider selling the stock.
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Tips & Warnings
Companies do not always reveal spin-offs and dispositions of assets.
Consider analyst stock price projections for consistency with your own estimates to eliminate mistakes.
Resources
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