19 years ago I invested $3000 in a utility. Dividends were reinvested and now it’s worth $28000. Is my interest rate really 43%??
That doesn’t sound right. This is simple interest calculation. Is ther another calculation that is more accurate?
With continuous compounding I calculate your annualized return to be 11.76%.
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Simple as in easy or simple as in not compound? Since your dividends are reinvested, it would be compound, so I assume you mean easy.
It depends on how the interest is compounded. Compounded quarterly, that works out to an equivalent of 11.93% over 19 years.
I got 11.814 using the first online calculator that came up to find the compound interest rate. That’s close enough to confirm what Saffer said (with enough of an error to say that they didn’t use the same exact formula/website/engine).
19 years is a long time, but that’s a nice return and we had a big downturn in the middle.
My financial calculator is telling me you got a 12.47 percent return. The timing and amount of the dividends makes no difference, if all you are looking at is $3k invested and a present value of $28k.
The question not answerable as given, because there is no specific “interest rate” that produces the result in question ($28,000, resulting from $3,000 put into a stock that pays quarterly dividends which are re-invested in the stock). What we CAN answer is: At what rate of interest would you have to invest $3,000 to produce $28,000 after 19 years, assuming compounding on a [insert compounding timeframe here] basis? The answer, of course, depends upon the time period between payment of interest. The less often it is paid, the higher the rate needs to be. The lowest rate will be the compounded continuously rate.
If you are trying to make a comparison to what you could have done had you chosen another financial instrument in which to invest the $3,000, it depends upon what was available 19 years ago. At various times, banks/investment firms offer continuous compounding; other times, compounding tends to be daily, or monthly. Of course, there’s not that much difference in the answer for those three options. It’s when you start compounding semi-annually, or annually that the interest rate would have to go up significantly to produce the same result.
Investment returns are usually quoted on an annual basis I think; your annual return was almost 12.5%. Google’s calculator is enough to solve this. Just type your three numbers into the Google search bar with a little glue:
exp(ln(28000/3000)/19)
This produces
1.12474628451
The final step is to subtract 1 (the principal) and multiply by 100 (“per cent”) to get 12.4746%.
Similarly, solving for quarters instead of years, converting to quarterly percent and multiplying by 4 to get annual percent
4*100 * (exp(ln(28000/3000)/19/4)-1)
Google produces the same 11.93% answer as wolfpup.
A simple compare to something like the DOW or the S&P 500, can be done with places like finance.yahoo.com. Put in the stock symbol for the utility company and then add the DOW and S&P 500 on their chart. For 19 years you would have to select a “max” time frame. Then you could see if the utility stock outperformed the DOW and S&P 500 over that period of time.
If you wanted to get really detailed, there is a history of stock prices. Might be a way to dump that data and use it to for your own calculations if something else doesn’t already exist to help do that.
Over 19 years, an 11% return each year if excellent. Since 1998 you certainly couldn’t have gotten that return from CDs
If the OP has a full service broker, they have ways to produce all sorts of performance reports for you.
Does finance.yahoo model dividend reinvestment? If so, I’ll happily switch! AFAICT, Google (and most such sites) do NOT have the dividend reinvestment option, despite that it’s key to making these comparisons.
The exponential that **septimus **provided comes from this equation:
Future Value = Initial Value * (1 + rate)^years
Since all values are known except for the interest rate, you can easily solve for that using a little exponentiation, as he has done. This gives “equivalent annual interest rate,” which assumes annual compounding.