What are to ways to yield a return from owning stock

When you begin investing in stock, it's important to understand how you might actually be able to make money from owning the stock; to intimately have a grasp on how the increase in wealth is generated for you assuming you've selected your position wisely. Though it seems complicated, at its core, it's quite simple.

The future value of stock must equal the sum of three components:

Let's take a moment to look at investing in stocks to illustrate how simple the process is.

The initial dividend yield on cost

The growth in intrinsic value per share (for most firms, this amounts to the growth in earnings per share on a fully diluted basis)

The change in the valuation applied to the firm's earnings or other assets, often measured by the price-to-earnings ratio

That is it. Those are the only three ways that someone who invests in stock can benefit economically. He can collect cash dividends, he can share in the proportional growth of the underlying earnings per share, and he can receive more or less for every $1.00 in profit a company generates based upon the overall level of panic (fear) or optimism (greed) in economy, which in turn drives the valuation multiple, also known as the price-to-earnings ratio.

For some companies, such as AT&T, the first component (dividend yield) is substantial. For others, such as Microsoft for the first 20 years, it isn't because all of the return comes from the second component (growth in intrinsic value per fully diluted share) as the software giant grew to tens of billions of dollars in net income per annum.

At all times, the third component, the valuation multiple, is fluctuating but has averaged at 14.5x earnings for the past 200 or so years in the United States. That is, the market has historically been willing to pay $14.50 for every $1.00 in net profit a firm generates.