Nobody has probably told you this but there is actually two ways to get rich and profit from owning stocks and mutual funds. One way in which stock ownership pays a return is through capital gains. When buying a stock, an investor is typically hoping that the perceived value of the company will rise, producing a capital gain when the shares are sold later at a higher price. For example, let’s say we bought 100 shares of McDonalds in June 2005 at $27.75 per share and sold it 10 years later at $95.00 per share. Avoiding all dividends and potential stock splits, our capital gains would be $6,725. The objective is to buy low and sell, right? Of course! That goes without saying on just about any sort of investment.
Now, the other way to profit from purchasing stocks are from those companies that pay out dividends – the portion of a corporation’s earnings that is paid to stockholders. Many common stocks and preferred stocks pay dividends usually on a quarterly basis. To give you a clearer picture on the way this works, we’re going to put our McDonalds Corporation stock in play again, surprise? I thought you wouldn’t be! As of July 24, 2015, McDonald’s stock closed at $96.10 and pays an annual dividend of $3.50 per share. So, let’s say you currently own 1,000 shares of McDonald’s stock. Eliminating any capital gains at this time, we will generate approximately $3,500 for the year, or $875 quarterly, or a little more than $290 per month. Again, not too shabby! In fact, McDonald’s has raised its dividend each and every yearsince paying its first dividend in 1976.
In conclusion, betting on the rise and fall of stock prices can be quite exhilarating, especially when your share prices soar. But while we wait, there is certainly nothing wrong with receiving a steady flow of passive income (dividends), which you can choose to spend or reinvest. Now, can you see that it’s actually two ways you can strike it rich by owning stocks and mutual funds!