- 1). Note the dividend payouts for each payment period. Some investment portfolios pay quarterly, while others may pay out on a bi-annual or even an annual basis. Your calculation will be based upon this payment period. If your investment pays out annually, you will calculate the internal rate of return on an annual basis.
- 2). Divide the first dividend payout by the rate of return, which for now we shall call "r," added by one. It is "r" that you want to solve for at the end of the calculation. Do the same for the second period payout, but this time raise (1+r) to the power of two. Repeat for the third dividend payout, but raise (1+r) to the power of three, and so on. Continue this pattern for all dividend payouts.
- 3). Add all the equations obtained in step two together. This will give you a much longer equation. Set this longer equation equal to the amount you originally invested in. Solving this equation for "r" will theoretically give you the internal rate of return; however, it is impossible to do this by hand. Various financial calculators will have functions that will enable this calculation, and the specific process of each calculator varies by brand.