Don't Make This Mistake When Researching Stock Prices

The most common mistake made by investors when researching the performance of a stock, ETF, or mutual fund is that they neglect to include dividends into consideration. This happens especially when making a comparison between multiple investment options.

Many investors will simply compare changes in value of an equity investment over time. This can be a huge mistake, especially when considering a company that pays a strong dividend.

Case Study: Eaton Corporation

Let's take a look at the five year stock performance of the Eaton Corporation, as shown according to Yahoo Finance.

The chart is reporting a cumulative return of 25.99% over five years. Not great, especially when compared to publicly traded companies in a similar business.

But hold on a tic - those square grey boxes near the bottom of the chart indicate something of importance. These are Eaton dividends, and they aren't negligible. As it turns out, Eaton is currently paying an annualized dividend yield of 3.30% to shareholders each quarter, or $2.64 for each share worth roughly 76 dollars today.

So what would our return look like if we re-invested those dividends back into Eaton stock? This is called a dividend adjusted return, and it's an important consideration for shareholders of companies like Eaton and hundreds of other dividend-paying companies.

How to Find Dividend Adjusted Return

In order to calculate dividend adjusted returns, we'll need to use a stock charting website that provides this function, such as stockcharts.com's PerfChart.

First, navigate to stockcharts.com and select PerfChart from the dropdown menu at the top of the page.

Next, you'll simply type in the ticker symbol of the stock or fund you are interested in. In our case, ETN.

The Result

The result is a five year chart assuming re-invested dividends. With re-invested dividends, the cumulative return is now much higher - closer to 45%! This tells a considerably different story than the previously assumed 25% return over the same time period.

So make sure you're looking at dividend adjusted returns when comparing stocks and funds. It just might make the difference between a good investing option and a great one.

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