MINTHow investors make money from stocks
The two ways shares can pay you, dividends and capital gains, how to add them up, and why neither is guaranteed.
Read at your own pace. A video for this lesson is on the way.
Before we begin
Quick answer: look at both dividends and changes in the value of your shares, then account for costs. By the end, you should be able to:
- Calculate dividend income and a price gain or loss separately.
- Combine them into a simple holding-period return.
- Explain why receiving a dividend does not guarantee an overall profit. Our learner is Kwame, a fictional teacher in Koforidua. The company, prices and charges below are invented. They are not current Ghana Stock Exchange quotes or tax rates.
Step 1: record the starting amount
Kwame buys 1,000 shares in fictional Adinkra Foods for GHS 2 each. Shares x purchase price = 1,000 x 2 = GHS 2,000. For the first calculation, ignore charges and taxes. Assume he holds the same 1,000 shares throughout the period and does not reinvest dividends. Keeping these assumptions visible makes the result easier to interpret.
Step 2: calculate the dividend
Suppose a dividend of GHS 0.10 per share is declared and Kwame qualifies for it.
- Shares held: 1,000.
- Gross dividend per share: GHS 0.10.
- Gross dividend: 1,000 x 0.10 = GHS 100. The net cash received can be smaller after applicable deductions. Check the actual notice and payment statement. Dividend eligibility depends on the announced dates, including the ex-dividend date and record date. Ask the broker how settlement affects eligibility; buying just before a payment date does not necessarily qualify you.
Step 3: calculate the change in value
Suppose the share price is GHS 2.30 at the end of the period.
- Ending value: 1,000 x 2.30 = GHS 2,300.
- Change in value: 2,300 - 2,000 = GHS 300. If Kwame still owns the shares, this is an unrealised gain. Selling at that price would realise the gain before costs. A displayed price is not a promise that every share can be sold immediately at that price. An unrealised loss still reduces his wealth; calling it "on paper" does not make it harmless.
Worked example: put the pieces together
| Component | GHS |
|---|---|
| Change in share value | +300 |
| Gross dividend | +100 |
| Total gain before costs and tax | 400 |
| Simple holding-period return = total gain / starting investment x 100. | |
| 400 / 2,000 x 100 = 20% for this period. | |
| This is not automatically a yearly rate. A return over six months and one over two years are different comparisons. More complex cash flows need a different calculation. |
Step 4: include costs without counting them twice
Now suppose, purely for practice, Kwame pays GHS 20 in buying charges and GHS 25 in selling charges. Suppose the GHS 100 gross dividend has GHS 8 deducted. These are invented deductions for arithmetic, not a statement of current rules.
- Starting cash paid: 2,000 + 20 = GHS 2,020.
- Net sale proceeds: 2,300 - 25 = GHS 2,275.
- Net dividend: 100 - 8 = GHS 92.
- Net gain: 2,275 + 92 - 2,020 = GHS 347.
- Net return: 347 / 2,020 x 100 = about 17.18%. This example assumes no other taxes or charges. Use actual statements for a real holding, including any other applicable deductions. See share costs and taxes.
Your turn: a dividend during a price fall
Start again with the simple GHS 2,000 purchase, ignoring fees and tax. The ending price is now GHS 1.70, but Kwame still receives GHS 100 in dividends. What is his total return?
Show the worked answer
Ending value: 1,000 x 1.70 = GHS 1,700. Price change: 1,700 - 2,000 = -GHS 300. Add the dividend: -300 + 100 = -GHS 200. Divide by 2,000 and multiply by 100: -10%. He received cash but lost value overall.
Step 5: recognise yield and reinvestment
If a share pays GHS 0.10 in dividends over a year and its price is GHS 2, its dividend yield is 0.10 / 2 x 100 = 5%. This measures dividends relative to that price; it excludes the price change. Reinvesting means using dividends to buy more shares. More shares can increase future dividend income if the dividend per share holds up, but future payments and prices may fall. Reinvestment does not turn an uncertain investment into guaranteed growth.
Common mistakes to avoid
- Looking only at the cash dividend while ignoring a falling price.
- Treating last year's dividend as next year's promise.
- Assuming a high dividend yield is automatically attractive; a falling price can raise the quoted yield.
- Forgetting the holding period, charges or tax.
- Expecting a calculator's smooth growth line to describe real share prices.
Put it into practice
Make three columns: starting cash paid, ending value or net sale proceeds, and net dividends received. Keep dates and charges alongside them. Try changing the return in the investment growth calculator, but treat it as a scenario, not a forecast. Next, learn how to examine company profits.
Key takeaway
A dividend can soften a loss without eliminating it. Judge the whole result over the same period, keep unrealised and realised amounts clear, and account for costs consistently.
Check your understanding
Choose an answer to see why it works or what to reconsider. You can try every answer. Nothing is scored or saved.
This is general financial education, not financial advice. Figures are illustrative. Speak to a licensed professional before making investment decisions.
Sources: Investor.gov, risk and return (general principles), Ghana Stock Exchange, FAQs, PwC Tax Summaries, Ghana withholding taxes
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