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Capital Gains Aren’t Everything: Why You Should Focus on Total Return
Stock Price isn’t the Only Thing that Matters
It can be very frustrating for new investors who are upset that their stocks haven’t increased in market value and generated ample capital gains over a few years. However, if they were to tell you what their total cash dividend payouts earned over those same few years had been, they would most likely look at you with confusion. If you’re not familiar with dividends, a dividend is a part of the company’s profit, and is paid to stockholders. Dividends are voted on by the company’s Board of Directors, and the percent of company profits that are paid to shareholders is called the dividend payout ratio. More mature companies that aren’t actively trying to expand much will typically have higher dividend payout ratios than the younger, fast growing companies.
Imagine that you are a partner in a private business with shares valued at $500,000. If you hold onto the stock for ten years, the value of the shares may or may not increase, but during the same ten years, you could receive $1,500,000 from cash dividends alone. Obviously, the initial investment of $500,000 was a smart one, and you should be very happy and proud of yourself. You would receive considerable checks every year becau