The bottom line is that owners of a company should be indifferent to whether they get their return via appreciation in the share price or receiving a portion of the profits.
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They do so by figuring out for all their candidates an "equity risk premium"--the amount of return (appreciation plus dividends) they want over safe ten-year Treasury bonds, based on their best guess.
The best of the bunch has been Exelon (nyse: EXC - news - people ) (60), which enjoyed a 20.4% annual return (price appreciation plus dividends) from 1998 through 2002, versus the industry's 2.6% average.
Since its conversion its total return, comprising stock appreciation and dividends, has far exceeded close competitors and the market.
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Christine Benz, director of personal finance at Morningstar, notes that much of last year's return came from price appreciation, not income.
We assume you are buying a growth stock and that half of its return comes as price appreciation and half comes as dividends.
Your goal should be to find the stock that offers the best potential to build wealth, regardless of whether the return is comes from price appreciation or dividend payments.
Over the long term, that compounded coupon is likely to be a larger component of overall total return than even sustained price appreciation, substantially smoothing over daily price fluctuations.
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The former means grinning and bearing the low rates of return, while hoping that capital appreciation will offset low yields.
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Collections of properties that kick off rental income, REITs have clocked an annual 24% total return--that's appreciation plus dividends--over the past three years, versus the broad stock index's 7.5%.
You add the dividend yield to your stock price increase to produce a total return that incorporates both the stocks yield and its capital appreciation.
And it is true that dividends add to total return, which is the combination of dividend income realized and appreciation (once realized) from owning equities.
At 2% you would make an annualized return of 32.55% from the carry on income and capital appreciation.
This does not necessitate a return to the colonial attitudes of the past, but rather a keener appreciation of our unique human, physical and political advantages.
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TSR, which dates back to the 17th century, is simply a measure of historic share-price appreciation plus dividends paid, expressed either in terms of cash or as a percentage return.
Take Bank of America's Minimum Return Eagles (the name, predictably, is a tortured acronym--Equity Appreciation Growth LinkEd Securities).
Take Bank of America (nyse: BAC - news - people )'s Minimum Return Eagles (the name, predictably, is a tortured acronym--Equity Appreciation Growth LinkEd Securities).
And return he did, creating an entirely new sound, one with a fresh perspective and a heightened appreciation for his own musical abilities and instincts.
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