Holding Period Return Calculator
With this holding period return calculator, you can easily find out the return on your investment using the holding period return formula. This metric takes into account both capital gains and income from dividends.
This article will help you understand what is HPR, which stands for holding period return, and how to calculate holding period return for stock. We will also show you how to apply the HPR formula in real life.
What is HPR? The holding period return definition
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.
How to calculate holding period return for stock?
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:
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 gainsfor the stock of Company Alpha is
$120 - $100 = $20.
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 yieldfor the investment is
$20 / $100 = 20%.
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%.
Calculate the holding period return
After finding all the inputs, it's time for us to calculate the
holding period return. As
holding period returnis 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 returnis
20% + 7.5% = 27.5%.
Why should we calculate the holding period return?
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.