Hi Dominic, in fact, the mutual fund doesn’t work this way. The distribution is actually not the “dividend”. It is just splitting the unit and make it sounds like distributing income.
I think your question is about calculating the compound interest.
Here is a great article explaining about this:
http://www.thecalculatorsite.com/articles/finance/compound-interest-formula.php
Let me explain briefly about stocks. There are two type of returns for a stock:
1. the dividend – this is paid out from the company’s profit and normally you will need to cash in the cheque sent to you, or with a nominee account, your broker will bank in to your account directly.
2. the capital gain.
As an example:
You buy stock A at RM1.00. At the 364th day, it distributed 5 sen dividend. On the 365th day, its market price is RM1.01. The gain for the first year is RM0.06 – 6% return.
You still hold on to it for another year. It gave another dividend of 10 sen, and the price is RM1.20. Now to calculate the compound interest, it will be more complicated and you will need to use the financial calculator that uses the formula:
A = P (1 + r/n) ^ nt:
Where:
A = the future value of the investment/loan, including interest
P = the principal investment amount (the initial deposit or loan amount)
r = the annual interest rate (decimal)
n = the number of times that interest is compounded per year
t = the number of years the money is invested or borrowed for
Normally we just use financial calculator. Here is an online calculator (or search for CAGR calculator) You get the compound interest calculated at: 16.19%
Beginning value: RM1.00
Ending value: RM1.35 = RM1.20 + 0.05 + 0.10
Number of periods: 2
As you can see above, the calculation is actually not accurate too. It should be slightly higher because you get the dividend 5 sen on year 1, not at the end of year 2. There are ways to calculate accurately but that will be too technical.
Hope this helps.
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