A stock can pay you in two ways: the price can rise, and the company can hand you cash along the way. Counting only one of them undersells what you actually earn.
Dividends: a share of the profits
A dividend is a cash payment a company makes to its shareholders out of its profits — often each quarter. If you own 100 shares and the company pays $0.50 per share, you receive $50, just for holding the stock.
Not every company pays one. Broadly:
- Mature companies with steady profits often pay dividends (they have cash they don’t need to reinvest).
- Growth companies often pay nothing, ploughing every dollar back into expanding — betting that a higher share price will reward you instead.
Neither is “better”; they’re different deals.
Dividend yield
To compare dividends across stocks, use the dividend yield:
Dividend yield = annual dividend ÷ share price
A $2 annual dividend on a $50 stock is a 4% yield. It tells you the cash return as a percentage, independent of how many shares you own.
Capital gains
The other way you profit is a capital gain — the share price rising above what you paid. Buy at $50, sell at $65, and you’ve made $15 per share. (Until you sell, it’s an unrealised gain — real on paper, not yet in your pocket.)
Total return = both, together
Your real reward is the two combined:
Total return = price change + dividends received
A stock that rises 6% and pays a 3% dividend gave you roughly a 9% total return. Judge a stock — especially a dividend payer — on total return, not the price chart alone. And reinvesting dividends to buy more shares lets the whole thing compound over time.
The takeaway
Stocks pay you through capital gains (the price rising) and dividends (cash from profits). Total return counts both — it’s the honest measure of what an investment earned you.