# Stock Investment Calculator toCalculate Expected Rate of Return

Explains expected rate of return (ERR) and calculates it for you using the dividend growth model for comparing stock investments.

This free online Stock Investment Calculator will calculate the expected rate of return given a stock's current dividend, current price per share, and the expected growth rate.

If you don't know the answer to the question, "What is Expected Rate of Return?", it may help to read the following explanations related to what expected rate of return is and what purpose it serves -- before using the stock investment calculator.

### What is Expected Rate of Return?

In the case of stocks, expected rate of return (ERR) is a formula used to forecast the future return on investment from a stock purchase -- which includes income from both equity and dividend growth.

### How is ERR Calculated?

To calculate the ERR, you first add 1 to the decimal equivalent of the expected growth rate and then multiply that result by the current dividend per share to arrive at the future dividend per share. You then divide the future dividend by the current price per share, and then add the decimal equivalent of the expected growth rate to get the ERR.

For example, if a stock had a dividend of \$1.50, a price per share of \$60.00, and an expected growth rate of 10%, then the expected rate of return would be 12.75%, computed as follows:

((1.50(1 + .10)) ÷ 60) + .10 = .1275, or 12.75%

Please note that the ERR formula is based on the dividend growth model which assumes that dividends will be paid and that both the dividends and the company will grow at a constant rate. Of course, neither of these assumptions will likely hold true in the real world, so ...

### What is Expected Rate of Return Useful For?

Since ERR is based on assumptions that rarely hold true, most investors use ERR to compare the potential returns of one stock investment with another. After all, the growth rate figure used in the ERR formula does account for the actual historical growth of a company's earnings per share. Therefore, using ERR to compare potential returns of investing in one company over another makes more sense (at least to me) than using a high expected rate of return as the sole reason for buying shares in a particular stock.

The bottom line is, all methods of forecasting the potential return on investing in a stock are simply methods of making educated guesses. Sure, the better your educated guesses, the more you increase the odds that you will achieve a fair return for the risks you are taking. But there is no way to guarantee that some unforeseen event won't cause you to lose your principal in short period of time.

With that, let's use the Stock Investment Calculator to calculate the expected rate of return of one stock for the purpose of comparing it to that of another stock.

Stock Investment Calculator

Instructions: Enter the current dividend price, the current price per share, and the stock growth rate, then click the "Calculate Expected Rate of Return" button.

If you need to calculate the stock growth rate, feel free to use the Stock Growth Rate Calculator (opens in a new window).

Mouse over the blue question marks for a further explanation of each entry field. More in-depth explanations can be found in the glossary of terms located beneath the Stock Investment Calculator.

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Current dividend per share (\$):
Current price per share (\$):
Stock growth rate (%):
Expected rate of return:
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### Stock Investment Calculator Glossary of Terms

Current dividend per share: Enter the current dividend per share.

Current price per share: Enter the current market price per share for the company you are researching.

Stock growth rate: Enter the calculated growth rate. Enter as a percentage (for .10, enter 10%). If you are not sure what the stock's growth rate is, feel free to use the Stock Growth Rate Calculator (opens a new window) on this site.

Expected rate of return (ERR): Based on your entries, this is the expected rate of return for the stock you are considering investing in. Please note that the stock investment calculator uses the dividend growth model, which assumes that future dividends will be paid and will grow on a constant basis, and that the company will grow on a constant basis as well. Of course, none of these assumptions will likely hold true in the real world. This is why ERR is primarily used to compare the potential returns of investing in shares of one company versus investing shares in another company.

Stock Investment Calculator

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