Tracking and reporting investments with dividends correctly
Comments
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Why would you add in dividend rates to IRR? Their return is in there already.Brian Mahon said:Very helpful, Jim, supports what I have been saying about INX, and clearly illustrates the difference between an accurate total return and the way Quicken calculates IRR. I am pleased to add SPXT to my indices and will struggle to figure out how I am doing in relation to it by roughly averaging my positions' dividend rates and adding them to the IRR Quicken gives me. I didn't realize we could add indices and will look to do so for other market indices.
Quicken Business & Personal Subscription, Windows 11 Home
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Read the above posts. It's not already in there and Quicken Help notes that it's not.Brian Mahon said:Very helpful, Jim, supports what I have been saying about INX, and clearly illustrates the difference between an accurate total return and the way Quicken calculates IRR. I am pleased to add SPXT to my indices and will struggle to figure out how I am doing in relation to it by roughly averaging my positions' dividend rates and adding them to the IRR Quicken gives me. I didn't realize we could add indices and will look to do so for other market indices.
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Or, I should say the dividend rates are not in there or accurately reflected on the way dividend reinvestments are handled.Brian Mahon said:Very helpful, Jim, supports what I have been saying about INX, and clearly illustrates the difference between an accurate total return and the way Quicken calculates IRR. I am pleased to add SPXT to my indices and will struggle to figure out how I am doing in relation to it by roughly averaging my positions' dividend rates and adding them to the IRR Quicken gives me. I didn't realize we could add indices and will look to do so for other market indices.
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No, it doesn't Bob, not if you reinvest them.Tom Young said:The page that q.lurker posted is in the Quicken "Help" file. Click "Help" > click "Quicken help" > type "Portfolio columns" in the find box and select the first item that's found. There's tons of information in the Help file about investments but you sometimes have to thrash around a bit to find it.
"What I am looking for is the total return on an equity based on cost of
purchase, dividends reinvested, and dividends in order to give me a
sense of whether I am in a net profit position. "
The sentence is a bit of a fruit salad. "ROE" can be positive while you have a net loss, and visa versa.
Simply looking at the security in Portfolio view or via the "Holdings" button in a particular Account will tell you if you have a profit, or not. The Investment report "Investment Performance" will create an Internal Rate of Return figure for any given security over any given period of time. This latter number allows you to measure which security has performed the best over time.0 -
Using your 100 shares example exactly as described above in a test file, Quicken does report an IRR of 120% in an Investment Performance Report. But you are correct that it only shows 100% for any of the gains calculated in the Investment tab views. I agree that is not right.Brian Mahon said:Very helpful, Jim, supports what I have been saying about INX, and clearly illustrates the difference between an accurate total return and the way Quicken calculates IRR. I am pleased to add SPXT to my indices and will struggle to figure out how I am doing in relation to it by roughly averaging my positions' dividend rates and adding them to the IRR Quicken gives me. I didn't realize we could add indices and will look to do so for other market indices.
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Brian, I agree that the various performance measures reported by Quicken are confusing and you have to study them carefully to understand what they are telling you. Here are some observations:
-- I have generally found that the Investment Performance report is the most useful for reviewing performance.
-- If you are interested in year-to-date performance as is reported by Morningstar and other sources of financial data, be sure to choose "Yearly" near the top of the Date range dropdown on the Investment Performance report, rather than the default "Year to date." If you pick "Year to date", it effectively assumes that changes in value for the first part of the year will continue at the same rate for the rest of the year.
-- Avoid including date ranges that include Added or Removed shares. If you transferred shares between accounts, be sure to include both accounts.
-- Be sure you have accurate price data for the start and end of your date ranges. You may need to do some research if you are going way back in time because Quicken's downloaded price data only goes back 5 years and the intervals are less frequent the farther back in time you go.
-- If you received dividends as cash, make sure to include the money market fund or where ever the cash went in the report.
-- I believe Quicken's IRR calculations are correct for reinvested dividends because as others have pointed out, the value of the shares bought with the dividends is included in the ending value of the security. As an experiment, you might compare the return with reinvested dividends to recording two transactions - the dividend received in cash then the cash used to purchase additional shares. Or you could compare Quicken's numbers to Excel's XIRR function.QWin Premier subscription0 -
Moreover, Markus, you get that difference for 1 security, but the Investment Performance Report and the Performance tab yield exactly the same result for the same time period for an entire account or portfolio--again, the results such as you got (accurate in the IPR but not in the Performance tab) devolve to the same inaccurate result of the Performance tab for the entire portfolio IRR in the Investment Performance Report.Brian Mahon said:Very helpful, Jim, supports what I have been saying about INX, and clearly illustrates the difference between an accurate total return and the way Quicken calculates IRR. I am pleased to add SPXT to my indices and will struggle to figure out how I am doing in relation to it by roughly averaging my positions' dividend rates and adding them to the IRR Quicken gives me. I didn't realize we could add indices and will look to do so for other market indices.
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I do everything you suggest, Jim, except for the Excel suggestion (I am not literate in Excel), but I still maintain the IRR is not accurate in Quicken given their own explanation for how it is calculated, and especially given how out-of-sync it is with the performance reported for various published indices with dividend reinvestment returns included such as the SPXT you have referenced. Markus' different results with my one security example demonstrates the inconsistency in Quicken, and his difference in results does not obtain with multiple securities such as those maintained in accounts and portfolios.0
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Brian,
Are you familiar with discounted cash flow analyses?Quicken Business & Personal Subscription, Windows 11 Home
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I just compared the returns reported by Quicken with those on Morningstar for a couple of my holdings. One was a mutual fund and one was an individual stock. To avoid inconsistencies due to timing of large buys and sells, I chose ones without much activity other than dividends.For the stock the dividends were received in cash and for the fund they were reinvested.
In Quicken I used the Investment Performance report with the date range set to Yearly and subtotal by security. I picked each of the years 2013-2016.
On Morningstar I went to the Performance tab on the Quote page for each security and looked at the annual returns in the table below the Growth of 10,000 chart.
Comparing the two sets of numbers, 8 data points total, the annual returns varied from -6.82% to +37.85% and agreed within 0.55%. I didn't dig deeper to ferret out the source of the discrepancies, but that is close enough for me.QWin Premier subscription0 -
Yeah, I see that in my production file but based on the investments/returns ledger in the report I'm leaning more towards evolved rather than devolved. The report has always been close to the investment firms rate of return so I'm more comfortable with the Investment tab returns converging with the Performance report. I'm with Harman that I just don't see a discrepancy worth agonizing over.Brian Mahon said:Very helpful, Jim, supports what I have been saying about INX, and clearly illustrates the difference between an accurate total return and the way Quicken calculates IRR. I am pleased to add SPXT to my indices and will struggle to figure out how I am doing in relation to it by roughly averaging my positions' dividend rates and adding them to the IRR Quicken gives me. I didn't realize we could add indices and will look to do so for other market indices.
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Jim, I think that Quicken is accurate for an individual position, whether stock or mutual fund, but not for an account or portfolio of multiple positions. Also, you are using a test case that does not often obtain (not much activity, so not the timing complications of returns that screw up Quicken's calculations and render them less than accurate as a reflection of total return or average annual return including the contribution of reinvested dividends). The link I included earlier for the index performance calculator for with and without dividends discusses some of the mathematical difficulties of getting an approximately accurate total return and average annual return (IRR) figure. Quicken's reports on IRR do not address the mathematical difficulties as far as I can see; they either account for cash dividends or for the additional share repurchased, but not both and not over the complicated time sequences and apportioning of dividend returns to the underlying shares purchased at various points in time. The calculation just do not accurately reflect rates of return including dividends and reinvested dividends. They are poor approximations. Your SPXT, for example, has a much higher 1 and 3 year IRR than Quicken reports for SPY in the Performance tab on the Portfolio view, and my Performance Report shows a much lower return for SPY than the reported returns for SPXT, so the SPY figure cannot be accurately representing dividends' contributions to total return. The Quicken returns have heuristic value, or approximate usefulness as a modeling, but they leave a lot to be desired if we are trying to accurately assess our total returns.0
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Markus:Brian Mahon said:Very helpful, Jim, supports what I have been saying about INX, and clearly illustrates the difference between an accurate total return and the way Quicken calculates IRR. I am pleased to add SPXT to my indices and will struggle to figure out how I am doing in relation to it by roughly averaging my positions' dividend rates and adding them to the IRR Quicken gives me. I didn't realize we could add indices and will look to do so for other market indices.
At least in the case of Fidelity, they acknowledge that the Performance figures for my investments online include cash dividends but do not include dividend reinvestments in the calculations of year-over-year performance while the S&P figure they give for comparison does and is significantly higher than the same figure in Quicken. Both the investment firm reports and Quicken have the same limitation. It may be what we're stuck with, but the divergences over time can be large and not really representative of how we're doing.0 -
Brian, back to your earlier observations about the difference between "Average Annual Return" vs "Return %" as shown in the Investing Portfolio view, it appears that the Average Annual Return is showing the results of your personal investment in a security, including the timing of your buys, sells, and any reinvestments of distributions. The numbers there match the numbers in the Investment Performance report for the same period.
The Return % is apparently based on downloaded data from Quicken's quote provider, which is why it is available for some but not all securities. Apparently this includes distributions such as dividends, but it is not clear (to me at least) whether these are assumed to be reinvested or received in cash. It is showing the raw performance of the security, not including any buys or sells you did during the period.QWin Premier subscription0 -
Brian, I still don't see the large discrepancies you are seeing. I don't hold SPY but I do have VFIAX, which is essentially the same. I am receiving the dividends in cash and there are no Buys or Sells in the account I selected. Unfortunately I don't have an example handy in Quicken where the dividends are reinvested, but you can see Morningstar's data below. Here is what Quicken is showing me:
Av. Annual Returns
Security 1-yr 3-yr 5-yrSPXT 15.57 9.68 14.95
Looks pretty close to me.
my VFIAX 15.84 9.65 14.98
Morningstar's VFIAX total return (Assumes divs are reinvested)
15.88 9.74 15.24QWin Premier subscription0 -
With buys and sells over variable time frames and dividends reinvested over time, the discrepancies will increase.
Even in your figures the Morningstar 5 year is 90 basis points above your return. Compounded over multiple 5 years periods, it becomes real money even in the simplified case you present. And I don't know how Morningstar computes.
If you can, look at Fidelity's report of an S&P index with dividends reinvested and note the divergence from what they report for account performance in which they do not include dividend reinvestment, thereby rendering the comparisons an apples-to-oranges comparison. Maybe someone you know has Fidelity accounts if you don't. I have more buys and sells and dividend reinvestments than you do, and the divergences are quite a bit larger.0 -
In fact, my divergences are about equal to my portfolio's dividends' rate of return0
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The return period withe the 90 basis point difference was 3, not 5 years, but the point still holds.0
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I bring it up because that is the basis for IRR. Understanding how a DCF is done is key to understanding what Quicken reports. That is it looks at the cash outflows, i.e. investments, and the inflows, i.e. Returns and the timing of each, and then solves for the rate of return that produces a net present value of zero. Cash flows in and out on the same day cancel each other out and are thus ignored. That is what reinvested dividends are as Tom Young also pointed out so well.Bob L said:Brian,
Are you familiar with discounted cash flow analyses?
My point is that IRR, as calculated in Quicken, properly treats reinvested dividends and in fact is probably superior to other published Measures of "return".Quicken Business & Personal Subscription, Windows 11 Home
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Markus and Brian, I set up a test account with an example like Brian's and Quicken's IRR calculations work work and display correctly for me. I am running Q win 2017 Premier R6.Brian Mahon said:Very helpful, Jim, supports what I have been saying about INX, and clearly illustrates the difference between an accurate total return and the way Quicken calculates IRR. I am pleased to add SPXT to my indices and will struggle to figure out how I am doing in relation to it by roughly averaging my positions' dividend rates and adding them to the IRR Quicken gives me. I didn't realize we could add indices and will look to do so for other market indices.
The transactions in the otherwise empty account are:
12/31/2015 Opening Balance $10,000
1/1/2016 buy 10,000 shares of a bogus stock at $1.00
1/1/2016 reinvest dividend 1000 shares at $1.00
Go to the security detail page for the bogus stock and add a price of $2.00 on 12/31/2016.
On the Investing Portfolio page if I set the date to 12/31/16, group by accounts, and display the Average Annual Return (%) 1-year column, it has exactly the same value (119.53%) as is displayed in the Investment Performance report.
I think the confusion is coming because you (quite reasonably) are looking at the Investment Performance page. If you look at the average annual return data at the bottom of that page, the 1 Year column is looking back one year from today, NOT using the date range you set at the top of the page. Very confusing!QWin Premier subscription0 -
Brian Mahon said:
Very helpful, Jim, supports what I have been saying about INX, and clearly illustrates the difference between an accurate total return and the way Quicken calculates IRR. I am pleased to add SPXT to my indices and will struggle to figure out how I am doing in relation to it by roughly averaging my positions' dividend rates and adding them to the IRR Quicken gives me. I didn't realize we could add indices and will look to do so for other market indices.
I think the confusion is coming ...
The other related source of confusion I am seeing is that the Investment Performance Tab AAR figures are not getting updated as the data changes. That is, if you change a price, the AAR figure in that view is not updated accordingly until I exit Quicken and reopen the file. I believe that also applies to new transactions added, such as test-dividend transactions. The AAR values in the Portfolio views and in an Investment Performance report are dynamically updated. (Bug in QW2017, not sure about earlier versions.)0 -
Bob, Jim, and Markus,Bob L said:Brian,
Are you familiar with discounted cash flow analyses?
I am getting closer to a Gilda Radner Rosanna-anna-danna "never mind" moment on this, but not completely. Even with Bob's point about Discounted Cash Flow in the Average Annual Return (IRR) computation, the zeroing out of the dividend return and its reinvestment loses some information re the timing and exact cost of the dividend reinvestment even though it is represented in the shares and in the market value of the security and in the portfolio value year-over-year. Since there is no transaction, the accounting is not completely accurate even if it roughly averages out over time, leaving us with a distinction without a practical difference. "Return Percent" in Fidelity's portfolio column customization choices reflects "change in value, dividends, capital gains, and return of capital" and seems to include reinvestments as a share transaction; I think this is more precisely accurate, but if I compare 1, 3, and 5 year IRR vs. Return Percent for positions I have held that long, there is not much difference practically, although there is some. IRR tells us what we would have had to make as a yearly compounded rate in an interesting bearing account to have the same compounded annual rate of return. If we want to have a reliable, pretty accurate comparison of how we are doing, fair enough.
I guess what got me going on this is that I have been using Quicken's Performance Chart and IRR to compare my performance to indices (S&P, Dow, Russell, and Nasdaq) over long periods of time (I have Quicken since 1992 and mostly downloaded daily or weekly, so I have the indices data). I have been feeling fairly good about beating the broad market, but when I began to take more note of the fact that Quicken's provided indices do not reflect dividend reinvestment, I had to question my assumptions fairly radically. Still doing fairly well, but not as well as I thought by comparison. Maybe there is a need to be more John Bogle in my approach in more of my portfolio even though even Burton Malkiel now acknowledges that there are factors such as size, value, and momentum that have beaten the broad market over time.
I may have been looking to find fault with Quicken's IRR calculations to comfort my distress. In any case, this has made me think more about comparison values and what the various return measures mean. It is a bit inexplicable to me that Quicken doesn't include basic indices with and without dividend reinvestments in its provided indices.
I appreciate the inputs and contributions.
Regards,
Brian0 -
"Since there is no transaction, the accounting isBob L said:Brian,
Are you familiar with discounted cash flow analyses?
not completely accurate even if it roughly averages out over time."
The IRR function is a mathematical function, it's not "accounting", and it uses cash flows as of a given date. Ergo, it's not necessary that a reinvested dividend, (cash out = cash in), be explicitly shown. I guess if you changed all your reinvested dividends to Div/Buy pairs you could see these transactions, (I haven't tried it), thereby "accounting" for them, but it shouldn't change the math.
From time to time I've run IRR reports on certain fund holdings over periods where I haven't sold shares or bought shares with "fresh" cash and I just don't remember ever seeing any marked difference between Quicken's calculation and whatever the fund was reporting.
As a practical matter a 15% IRR on a particular fund where dividends have been reinvested isn't as good as a 15% IRR from another fund which pays no dividend but simply has increased its share value. That's because the cash flows are all pre-tax and there's no simple way to incorporate the taxes you have to pay on those reinvested dividends.0 -
Just noting, I mistakenly wrote "Fidelity's" instead of "Quicken's" above in the sentence about the definition of Percent Return in Quicken's columnar choices in portfolio customization choices.Bob L said:Brian,
Are you familiar with discounted cash flow analyses?0 -
Tom:Bob L said:Brian,
Are you familiar with discounted cash flow analyses?
Maybe, then, Bob is incorrect in saying IRR uses discounted cash flow, which on further reflection is, of course, a method for figuring out what the current value of an investment 'should be' based on future cash flows, discounting them to a present value based on an assumed long term interest rate, stable or increasing earnings and so on--basically, Buffett's approach in determining whether or not an investment is a good value now.
The cash flow analysis in Quicken's IRR does track cash flow on particular dates. Since cash in = cash out zeroes out, it is not in the cash flow analysis, at least not in the formula Quicken gives which only accounts for transactions or cash flow on particular dates.. If it were simply a dividend, it would be included, but a dividend reinvestment is included by adding to shares and thereby increases in value, but it is not represented in the cash flow analysis of the equation for IRR on a particular date, which is what the formula specifies for transactions. That is why Quicken help specifically states that IRR does not directly include reinvested dividends. They are in the calculation, but not by date, only represented as occurring within the time period specified by adding to shares and value in the computation of solving for interest rate. I do not think I am misunderstanding the math. It is approximately right, and I do believe you get slightly different return figures if you enter the dividend as cash and then reinvest it as I understand Percent Return does, but, again, it probably a distinction without practical difference.0 -
Bob L said:
Brian,
Are you familiar with discounted cash flow analyses?It is approximately right, and I do believe you get slightly different return figures if you enter the dividend as cash and then reinvest it as I understand Percent Return does, but, again, it probably a distinction without practical difference.
Your "belief" is wrong. If you replace a Reinvestment with a Dividend received and a Buy shares on the same date for the same dividend amount, share price and share amount, you will get exactly the same IRR value. There is no approximation in the math. The math will indicate that on that particular day you had both a return (the dividend) and an investment (the buy shares) for the exact same amount. Those two transactions counterbalance each other mathematically such that it does not matter on which day the pair (or the singular reinvestment for that matter) occur.That is why Quicken help specifically states that IRR does not directly include reinvested dividends.
I keep trying to find the context for this statement and I cannot find it in the Quicken Help screens. Can you provide more direction as to where you are seeing this?0 -
Dear q.lurker:Bob L said:Brian,
Are you familiar with discounted cash flow analyses?
Here are screen shots of Quicken's definitions, respectively, of Average Annual Return (IRR) and Return on Investment (Percent Return):
As you can see, IRR doesn't include dividend reinvestments, or capital gains reinvestments, or interest reinvestments either. Rather, as I have said, it includes beginning value and final value for the period selected, and the transactions of investments and returns. In this calculation, it does not include dividend reinvestments or capital gains or interest reinvestments either, although it does include their contribution to the final value, but not their cost at the time of purchase (i.e., the dividend value). If there is no transaction recorded for reinvested amounts (you can verify this by running the report subtotaled by security), the report is an approximation, whether the return and the investment zero out or not (and that is an accounting convention, not a given of mathematical computation, which could be made more complex to account differently for what went on the real world of our accounts). The math 'works' because it solves for the compounded annual rate of interest a bank account would have to make to equal our accounts' average annual yield (IRR).
In contrast, ROI (or Percent Return) specifically computes for the dividend, capital gains, and interest reinvestment transactions.
The math of the approaches to understanding return is different and each formula gives slightly different results as to yearly compounded return, just as different sources give slightly different average annual return amounts. If the formulas were exactly the same and math is not an approximate modeling rather than a certain truth about the world, then there should be no discrepancies.
Math formulas give us what they compute and no more, and, past simple computations, they are modeling reality to help us measure the world. In that sense, math is always an approximation of any real world complexity. Newtonian physics is accurate in what it models within a certain range of phenomena, but it cannot be used to get rockets to where we want them to go in space. To do that the astrophysicists have to apply the chaos math of the orderly but randomly varying universe in their guidance systems as well as other astrophysics formulas and complex nonlinear formulas. Simple Newtonian calculations of power and trigonometric arcs won't do.
Respectfully.0 -
By the way, I do know that the same discounted cash flow equation is used in IRR and determining Net Present Value of a considered investment based on a hypothetical discount rate chose from likely risk-free interest rate or rate of other available investments and so on, but the 'solving' is quite different.Bob L said:Brian,
Are you familiar with discounted cash flow analyses?
There is this about IRR calculations from Investopedia: "Internal Rate of Return: Trial and Error. Before the age of computers, very few people took the time to calculate IRR. There isn't really a set equation for IRR; it's more of a concept than a true formula. So, the formula can vary, and depending on the construction of the formula, we get different results, perhaps not of very large quantity, so practically unimportant, but different approximations nevertheless.0 -
"By the way, I do know that the same discounted cash flow equation isBob L said:Brian,
Are you familiar with discounted cash flow analyses?
used in IRR and determining Net Present Value of a considered investment
based on a hypothetical discount rate chose from likely risk-free
interest rate or rate of other available investments and so on, but the
'solving' is quite different."
The Internal Rate of Return is the interest rate (r) that results in the Net Present Value being $0. Solving for r is an iterative process that's quite easy to do with a computer. So you provide an appropriate interest rate, (conceptually your "cost of capital"), and solve for NPV or set your NPV to $0 and solve for r.0
