Two Buys and a Sell: Dissecting Stock Returns
We look at three components of a stock's expected return.
Much can be learned by taking things apart. If I want a 20% return on a stock, I want to buy the stock for $50 and end up with $60 by the time I sell it. But how realistic is my desired return for any particular stock? One way to try to answer that question is to break down the desired return into its constituent parts. My future return on the stock can come in three ways. The company can grow. The price multiple between my purchase date and the sale date can rise. Or I can collect dividends and earn the return that way.
The way this is usually expressed is:
Haywood Kelly, CFA has a position in the following securities mentioned above: KMX, MSFT. Find out about Morningstar’s editorial policies.