Disclosures and Caveats: Dividend Values
Using a Single Dividend Value for a Changing Dividend Stream
The With Dividend calculator takes a single dividend and shows you a percentage return for your dividend based on the purchase price of the stock. In the real world dividend payouts change over time. However, you don’t want to put in 5 different dividends with time frames into With Dividend and I don’t want to have to process them. So let’s look at some ways to compute the average dividend so you can input one number into With Dividend.
The best way to compute one dividend for a dividend that changed over time is to compute a weighted average dividend value. Given the time value of money (dividends paid earlier worth more), this is not a perfect solution, but it is a good approximation. The weighting is the number of years the dividend was paid over the total number of years the investment was held. Here are two examples of computing a weighted average dividend.
Example One:
Suppose you held a stock for 10 years and it paid a $2 dividend for the first 5 years and a $4 dividend for the last 5 years. Here is the weighted average calculation:
Answer = $3 = (5 yrs/10 yrs) * $2 + (5 yrs/10 yrs) * $4)
Example Two:
A company pays a $1 dividend for one year, a $2 for eight years, and a $3 dividend for one year. Here is the weighted average calculation:
Answer = $2 = (1yr/10 yrs) * $1 + (8yrs/10yrs) * $2 + (1yr/10 yrs) * $3