When deciding on stocks to purchase for your portfolio, you want to be able to estimate the potential returns. If you expect the stock to continue to grow by the amount it grew in the previous year, you can calculate the expected growth rate so that you can figure the rate of growth to use over a longer period of time. To calculate the expected growth rate, you need to know the initial price, final price and the dividends paid during the year.
Subtract the starting price of the stock from the ending price to find the gain or loss. For example, if the price started the year at $66 and ended the year at $70, it gained $4.
Add the dividends to the change in price to calculate the growth after dividends. In this example, if the stock paid $1.50 in dividends, add $1.50 to $4 to find the total gain equals $5.50.
Divide the total gain by the initial price to find the rate of expected rate of growth, assuming the stock continues to grow at a constant rate. In this example, divide $5.50 by $66 to get a 0.083 growth rate, or about 8.3 percent.
- "USA Today"; Calculating Your Loss on a Stock is All Too Easy; Matt Krantz; November 2007
- Money-Zine.com: Calculating Stock Prices
- Aswath Damodaran, Stern School of Business, New York University. "The Stable Growth DDM: Gordon Growth Model," Page 1. Accessed Aug. 10, 2020.
- Aswath Damodaran, Stern School of Business, New York University. "Dividend Discount Models," Page 2. Accessed Aug. 10, 2020.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."