This is really the bottom line to investors. The only reason you own a business is to profit from it. The way you profit by owning stocks is through capital appreciation and dividends.
Through Capital Appreciation
Sometimes called capital gains, capital appreciation is the profit you keep after you buy a stock and sell it at a higher price.
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Expressed as a percentage, the difference between your purchase price and your sell price is your return. For example, if you buy a stock at $30 and sell it later for $60, your return is 100 percent. Sell it later for $90 and your return is 2 percent. If you bought Cisco in 1990 at 10 cents and sold it in 2000 at $70, your return was 69,900 percent.
Through Dividends
As an owner of a company, you might share in the company’s profits in the form of a stock dividend taken from company earnings. Companies report earnings every quarter and determine whether to pay a dividend. If earnings are low or the company loses money, dividends are usually the first thing to get cut. On a declaration date in each quarter, the company decides what the dividend payout will be.
To receive a dividend, you must own the stock by the ex-dividend date, which is four business days before the company looks at the list of shareholders to see who gets the dividend. The day the company actually looks at the list of shareholders is called the record date.
If you own the stock by the ex-dividend date, and are therefore on the list of shareholders by the record date, you get a dividend check. The company decides how much the dividend will be per share, multiplies the number of shares you own by the dividend, and mails you a check for the total amount. If you own 100 shares and the dividend is $.35, the company will mail you a check for $35 on the payment date. It’s that simple.
Most publications report a company’s annual dividend, not the quarterly. The company that just paid you a $.35 per share quarterly dividend would be listed in most publications as having a dividend of $1.40. That’s just the $.35 quarterly dividend multiplied by the four quarters in the year.
Total Return
The money you make from a stock’s capital appreciation combined with the money you make from the stock’s dividend is your total return. Just add the rise in the stock price to the dividends you received, then divide by the stock’s purchase price.
For instance, let’s say you bought 200 shares of IBM at $45 and sold it two years later at $110. IBM paid an annual dividend of $1.00 the first year and $1.40 the second year. The rise in the stock’s price was $65, and the total dividend paid per share was $2.40. Add those to get $67.40. Divide that by the stock’s purchase price of $45 and you get 1.5, or 150 percent total return.
