Investors in stocks earn in two ways – capital gains and current income. The total shareholders' return measures the combined return from change in stock price and from dividends.
Capital gain refers to the change in market price of the stock. Current income refers to the dividends distributed by the company from its earnings.
The formula in computing for the total stockholders' return (TSR) is:
| TSR | = | Capital gains + Current income |
| Initial stock price |
or
| TSR | = | Change in market price + Dividends |
| Initial stock price |
1. Mr. X purchased 1,000 shares of a publicly listed company for $10 per share. The company declared a cash dividend of $0.50 per share. Mr. X received the dividends. After a year, he sold all the shares for $12 each. Compute for the total stockholders' return.
| TSR | = | Change in market price + Dividends |
| Initial stock price | ||
| = | ($12 - $10) + $0.50 | |
| $10 | ||
| TSR | = | 25% |
2. ABC Company's shares were selling at a market price of $220 per share at the beginning of the period. At the end of the year, the market price of the stock increased to $255. The company declared cash dividends of $4 per share. Compute for the total return to the company's stockholders.
| TSR | = | Change in market price + Dividends |
| Initial stock price | ||
| = | ($255 - $220) + $3 | |
| $220 | ||
| TSR | = | 12.73% |
Total shareholders' return is equal to total gains divided by initial stock price. Total gains is equal to change in stock price (or capital gains) plus dividends.
