An investment in shares of stock does not come with a guarantee concerning the future returns. The trade-off for an unknown future is the potential to make significantly higher gains than what can be earned from investments that pay a fixed return. Stock shares reward investors in two possible ways and one is significantly more predictable than the other.
Price Gains and Dividends
When you own stock, profits can be earned from either an increasing share price, the receipt of dividends or a combination of the two. Stock shares are shares of ownership in a company. The company can share profits with shareholders in the form of dividend payments. The share price of a stock is set through a supply and demand process as shares trade on the stock market. Not every stock pays dividends. The board of directors of a company decides whether or not to pay dividends.
For those companies that do pay dividends, the common practice for U.S. companies is to pay a dividend every quarter -- four times a year. The total of the four quarterly payments is the annual dividend amount. The quarterly and annual dividend rates for individual stocks are published by the online financial websites and on the investor information pages of a company's website. To determine the size of dividend payment you will receive from your stock shares, multiply the current dividend rate times the number of shares you own. The dividend amount will be deposited as cash into your brokerage account or sent to your checking account.
Variability of Dividends
The dividend rate paid by a stock can change at any time. Some companies have a history of paying steady dividends for many years. Some of these companies have also increased the dividend rate every year for many years, enriching shareholders over time. Other companies pay dividends that vary from quarter to quarter and year to year, based on the profits of the company. The investor relations Web pages of the company will show the dividend payment history. A review of the dividend payments over a period of years will show you what kind of dividends you could expect to receive in the future.
Stock Earnings Considerations
The return from your shares of stock will be a combination of share price gain or loss and the dividends you earn. Stocks that pay a high dividend rate tend to pay out most of the company profits in the form of dividends. The share price of these stocks tend to increase at a slow pace. Stocks that pay little or no dividend usually are reinvesting profits to grow the company. These stocks should produce larger share price gains. However, the value of stock shares can go down as well as up, and you cannot predict how much your shares will gain, or even if there will be a gain. Over the long term, stocks have generally gone up in value with individual stocks sometimes following the market and sometimes going against the market.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.