Holding Period Return Calculator

Holding period return is defined as the return that you will receive over the period you are holding an investment. For every stock investment, there are two sources of income, namely capital gains and income from dividends.

This theory is easy to understand. If you invest in a stock, you will get your returns either when the stock price rises or the company pays out dividends. Calculating the holding period return allows you to understand more about your investment returns by quantifying them.

Let's explore how the holding period return formula works using an example. Let's assume you have bought a stock of Company Alpha with the following information:

• Stock name: Company Alpha;
• Bought price: $100;
• Current price: $120; and
• Dividend income per share within the holding period: $7.50.

Calculating the holding period return using the HPR formula requires only four steps:

1. Calculate the capital gains

   Capital gains are the return you will get when the price of the stock you've invested in moves. For instance, if the stock price moves up by $10 after you bought it, your capital gains will be $10. On the other hand, if the price drops by $10, your capital gains will be -$10. So, the capital gains can be calculated using the following formula:

   capital gains = current price - bought price

   In our example, the capital gains for the stock of Company Alpha is $120 - $100 = $20.

2. Calculate the capital gains yield

   Capital gains yield is the percentage return of your capital gains and can be calculated using the formula below:

   capital gains yield = capital gains / bought price

   In our example, the capital gains yield for the investment is $20 / $100 = 20%. Simila

3. Calculate the dividend yield

   Dividend yield can be calculated by dividing dividend income per share by the bought price of the stock:

   dividend yield = dividend income per share / bought price

   Thus, in our example, dividend yield = $7.50 / $100 = 7.5%.

4. Calculate the holding period return

   After finding all the inputs, it's time for us to calculate the holding period return. As holding period return is made up of capital gains and dividend income, its defined as the sum of both parts, as shown in the holding period return formula below:

   holding period return = capital gains yield + dividend yield

   For our investment in Company Alpha, the holding period return is 20% + 7.5% = 27.5%.

The main benefit of calculating the holding period return is to better understand the performance of our investment. Most people focus on price appreciation when they are investing in the market. However, dividend income plays a huge part as well. Calculating holding period return allows us to take into account both the capital gains and the dividend income.

Moreover, the holding period calculation also helps us to compare the actual performance of different investments, for example, if you are comparing the stock of Company Alpha from above with that of Company Beta. Say the price of Company Beta has increased by 24% in the period and has a dividend yield of 2%, compared to the 20% and 7.5%, respectively, of Company Alpha. Without calculating the holding period return, most investors will perceive Company Beta as a stronger investment than Company Alpha as Company Beta has a greater price increase.

However, if you compared to holding period return, which includes the dividend income, you will quickly realize that Company Alpha is actually a superior investment as it has a holding period return of 27.5% compared to the 26% holding period return from Company Beta.

Therefore, it is advisable to take into account both the capital gains and the dividend income when performing your investment analysis.