Question

You are considering two investment alternatives. The first is a stock that pays quarterly dividends of 0.38 per share and is trading at ​$21.72 per​ share; you expect to sell the stock in six months for ​$25.26. The second is a stock that pays quarterly dividends of ​$0.64 per share and is trading at ​$29.75 per​ share; you expect to sell the stock in one year for ​$30.58. Which stock will provide the better annualized holding period​ return?

Answer 1

Holding Period Return = (Investment Appreciation + Investment Income) / Beginning value of the investment

Investment Appreciation = Ending value of the investment - Beginning value of the investment

Investment Income =  Distributions or cash flows from the investment (e.g., dividends)

Annualized holding period​ return = (1 + Holding Period Return)^(1/n)-1

n = Holding Period in Years

Quarterly dividends paid by first stock = $0.38

Total dividends paid by first stock in six months =  2 * 0.38 = $0.76

Holding Period Return for the first stock = (($25.26 - ​$21.72) + ($0.76))/$21.72 = 4.30/21.72 = 19.80%

Annualized holding period​ return first stock = (1+0.1980)^(1/0.5)-1 = 43.52% [n = 6 Months or 0.5 Year]

Quarterly dividends paid by second stock = $0.64

Total dividends paid by second stock in six months = 4 * 0.64 = $2.56

Holding Period Return for the second stock = (($30.58 - ​$29.75) + ($2.56))/$29.75 = 3.39/29.75 = 11.39%

Annualized holding period​ return second stock = (1+0.1139)^(1/1)-1 = 11.39%  [n = 1 Year]

First stock with Annualized holding period​ return of 43.52% provides the better annualized holding period​ return .