An investor buys a stock at $50, receives $1 dividend, and ends the year at $60. What is the annual rate of return?

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Multiple Choice

An investor buys a stock at $50, receives $1 dividend, and ends the year at $60. What is the annual rate of return?

Total return accounts for both price appreciation and any income received, like dividends. For one year, return = (Ending price − Beginning price + Dividends) / Beginning price. Here, 60 − 50 = 10 is the price gain, and the dividend is 1, so the numerator is 11. 11 divided by 50 equals 0.22, or 22%. This matches the idea that you earned money from both the stock’s rise and the dividend. Ignoring the dividend would yield only a 20% return, which is why that approach is incorrect.

Total return accounts for both price appreciation and any income received, like dividends. For one year, return = (Ending price − Beginning price + Dividends) / Beginning price. Here, 60 − 50 = 10 is the price gain, and the dividend is 1, so the numerator is 11. 11 divided by 50 equals 0.22, or 22%. This matches the idea that you earned money from both the stock’s rise and the dividend. Ignoring the dividend would yield only a 20% return, which is why that approach is incorrect.

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