Final answer:
A dividend is a payment to shareholders from a company's profits, with the amount received based on the number of shares owned. Investors seek returns from dividends and capital gains, where gains are made from the increase in stock value between purchase and sale.
Step-by-step explanation:
When a company decides to reward its shareholders with a portion of its earnings, it can do so through dividends. A dividend is a direct payment made to shareholders, which correlates with the number of shares owned.
For instance, a dividend payment of 75 cents per share would result in an individual holding 85 shares receiving a total dividend payout. Firms like Coca-Cola and utility companies are known to provide stable dividends to their shareholders.
Beyond dividends, investors also look for a rate of return in the form of capital gains, which occur when the stock price increases from the purchase price to the selling price, such as buying a share of Wal-Mart for $45 and selling it for $60, thereby realizing a $15 gain.
Historically, the average company within the S&P 500 index paid out dividends equating to about 4% of its stock value from the 1950s to the 1980s. However, since the 1990s, dividend rates have decreased, with returns often closer to 1-2%.
Despite this downward trend, the difference in percentage yield from capital gains and dividends has varied over time, with the 1980s and 1990s seeing higher capital gains compared to dividends. In recent decades, dividends have remained low, but stock prices have shown a general upward trend, contributing to gains for investors.