Tuesday, March 5, 2013

Rate of Return (ROI) on Real Life Investments

In 2012 I have acquired some investments and would like to review their effectiveness. The way I calculate rate of return is quite simple:
-         For the shares /equities with dividends paid:  (price at the end of the year – price at the beginning of the year + dividends paid)/ price at the beginning of the year.
-         For the mutual funds or shares with the dividends reinvested: (price at the end of the year – price at the beginning of the year)/ price at the beginning of the year.

I used my current investments as real life example of rate of return on the investments:

Vanguard Energy ETF - VDE
Gazprom OAO (GAZ:FRA)
Company shares
Number of holdings
248 to 260
30th December 2011
30,243 (@100.81)
32,130 (@10.71)
9005 (@36.31)
28th  December 2012
30,057 (@100.19)
8736 (@33.6)
537* (1.99 per share)
1219** (@ 0.45)
12 shares or 388**
Dividends %
Overall return $
Overall return %
*10% taxes paid.
** projected dividends, 10% taxes paid.

-         As Company shares dividends are get reinvested straight away, these are not subject to 10% income tax, the investment returns are 4.9% not 4.4%.
-         Overall return or otherwise called total shareholder return is not very informative metric, particularly with the stock market ups and downs. In the example you could see Vanguard Energy ETF is clear winner,  however from dividends prospective it’s performed very poorly. One of the reasons is that the companies  composing the ETF are overvalued.
-         For the long run annual appreciation is important, but dividends as well if you are re-investing them. You can hardly predict market fluctuations, but income stream and rate of return are m0re reliable metrics.
-         Directly re-investing dividends has a tax advantage, rather than receiving them into brokerage /bank account and pay income tax before investing the money again.
-         All investments performed below inflation level, i.e. lost money.  As there has been no appreciation in terms of the stock growth, dividends are barely compensating for the inflation.

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