Are you getting good returns?

Growing
August 13, 2018

Everyone dreams of buying an investment at a low price and selling at a high price. And for the most part that’s what we try to do. But how do you know which investments are good investments? Where are you getting your best return on investment (ROI)? Have you compared their returns to your other investments to measure their contribution to your whole portfolio?

If you haven’t now’s a good time to see if you’re getting the best ROI for your money.

What is 'investment income'

Investment income is the money you make, over and above the original cost of purchasing your investment.

It can come from interest payments, dividends or gains collected upon the sale of your investment and can be received in two different ways:

  1. a regular source of income, such as when you receive dividend payments from the ownership of your shares. Dividend paying companies may be sought by moderately conservative investors specifically looking for income-generating investments. These types of investors might also consider dividend reinvestment programs and taxes. Dividend reinvestment allows you to reinvest your dividends in more of the same shares.
  2. a lump sum, such as when you sell your shares for more than you purchased it.

Net investment income

Net investment income is your investment income, minus related expenses and tax.

Expenses might include:

  • broker fee for purchasing
  • exchange rate fee
  • account or transaction fee
  • management fee, and / or
  • broker fee to sell.

Generally, all investors must also pay taxes on investment income regardless of whether or not they are reinvested. Your individual tax rate on investment income will depend largely on the total amount of your other sources of income (such as salary or wages), and possibly also on whether it is interest income, dividend income or capital gains.

The following outlines an example to help bring all this information together for you. This example is not telling you what to invest in now, or in the future, and certainly not saying that you should rush out and buy the shares discussed in the example, before talking to someone who is a qualified financial advisor first. 

To calculate your net return on investment

You may feel elated because your Apple shares (APPL) have increased $20 each... but not that excited about your Fisher & Paykel Healthcare shares (FPH) which have only increased $3.50 each. On face value APPL have gained significantly more, so in terms of return they have to be the winner, right? 

To compare apples with apples (no pun intended!) let’s work out the net return on each investment to see which shares are giving you the biggest bang for your buck so far.

We get into some number-crunching now, so if your eyes generally glaze over at this point, don’t worry. Finappster can track your NZ and Australian shares (watch this space for US shares), and calculate your return on investment for you. Sign up now, or, if you’re actually interested in this stuff, read on. 

Assuming you brought shares from both companies through your online broker, on 1 June 2017 and still own them (as at 1 March 2018):

You brought 100 APPL shares at USD153.46 each (a total of USD15,346.00)*. Your broker charged you 0.80% (USD122.77) for the purchase and an exchange rate fee of 1.00% (USD153.46) along with agency fees (they had to buy them from another broker, who also charged you fees) at 0.40% (USD61.38) so with the exchange rate of 0.7088** at the time your 100 APPL shares cost a total of   NZD21,910.49.

APPL have paid three lots of dividends since then, which were deposited into your investment account each time. You paid exchange rate fees (1.00%), to get them converted into NZD and then got taxed (17.50%) each time to net you a total of $214.78.***

On 1 March 2018 you checked the value of your APPL shares and they were USD174.95* each. Multiplied by your 100 shares, turned into NZD, added your dividends and taking away the cost of your initial purchase, you’ve gained NZD2,398.78. This is your investment income. To calculate your ROI, divide your investment income by the total cost to purchase them, and you’re sitting on a 10.95% ROI. Pretty sweet huh?

OK, so let’s look at your FPH shares:

On the same day you also brought 1,000 FPH shares at NZD10.06 each (a total of NZD10,060.00)*. They’re local shares so your broker charged you less, and didn’t have to buy them through another broker so you only got charged 0.30% (NZD30.18) for your purchase. In total, your FPH shares cost you NZD10,090.18.

FPH have paid two lots of dividends**** since you brought them, which was deposited into your investment account each time. You got taxed (17.50%) each time to net you a total of $165.00.

The net effect

When you checked how your APPL shares were performing, you also checked the value of your FPH shares and they were NZD13.56* each. Multiplied by your 1,000 shares, added your dividends and taking away the cost of your initial purchase, you’ve gained NZD3,634.82. You know the deal - divide your investment income by your total purchase cost and you’re on a 36.02% ROI. Even sweeter huh?

So, while it doesn’t feel like FPH has performed as well as APPL, all the additional costs you had to pay to purchase your APPL shares, and exchange rate, are impacting your profits in a big way.

In terms of money in your pocket, your FPH shares are actually providing you with a higher return - three times more than your APPL shares in fact.

If your eyes glazed over about half-way through, don’t worry. Finappster can do all this for you, so sign up now.

Sources

* share prices

** NZD to USD historical exchange rates 

*** APPL dividend payment information

**** FPH dividend payment information

Make informed decisions quickly with information at your fingertips.