Every investor wants to generate positive returns – and the higher the better.
At the end of the day, we invest to make money. Have you ever thought about where returns come from?
Stock Market Returns
Stock market returns can come from only 3 sources:
- Increase in P/E ratio
- Increase in earnings-per-share
Note: The above is a bit of a simplification for points 2 and 3. The idea is that valuation multiple growth and per-share intrinsic value growth increase the share price. This isn’t always measured in earnings or the P/E ratio, but those are the most common metrics used.
Dividends are the most straightforward type of return. It is literally money paid from the company you invested in to you.
An increase in the P/E ratio means the perception of the business has improved – fairly or unfairly. This pushes up the stock price.
An increase in earnings-per-share means the underlying value of the business has grown, pushing up the share price.
You can read more about how to calculate expected total returns here.
Each of these aspects of return is important. Many investors focus only on the aspect they feel is most important:
- Dividend investors emphasize dividends (higher is better)
- Value investors emphasize the P/E ratio (lower is better)
- Growth investors emphasize earnings growth (higher is better)
Another Note: Of course, many value investors care about growth, and growth investors about dividends, and so on. The idea is that they put the lion’s share of their investment philosophy on 1 criteria.
What would happen if we took all of the sources of return into account?
The 8 Rules of Dividend Investing factor in value, growth, dividends, and safety to find great dividend paying businesses trading at fair or better prices.
The culmination of this work is the Sure Dividend Newsletter, which has detailed analysis on the Top 10 stocks using The 8 Rules of Dividend Investing. Click here to start your 7 day free trial today.