How Do Shareholders Get Money? The Secrets of Earning Through Ownership

How exactly do shareholders make money? Let’s dive into the practical, highly profitable ways shareholders generate wealth—and how these strategies can work for you. Shareholders are essentially investors in a company, and their primary goal is to see their investment grow. But the methods by which shareholders get paid are more complex and varied than you might expect. Below, we will explore these mechanisms, break down the data, and highlight key strategies you can use if you're looking to dive into the stock market.

1. Dividends: The Cash Flow King

Dividends are the most straightforward and immediate way shareholders get paid. Dividends represent a portion of a company's profits that are distributed to shareholders, usually in cash or additional shares. Not all companies pay dividends, but those that do often make it a significant incentive for investors. Companies like Coca-Cola or Procter & Gamble are well-known for consistently paying dividends.

• Why are dividends important? Imagine you're holding 1,000 shares in a company that pays an annual dividend of $1 per share. This means you'll get $1,000 just for holding that stock. Even if the stock price doesn't increase, you're getting paid simply for being a shareholder. That’s cash flow right into your bank account.

• How to maximize dividends? Look for companies with a strong history of paying and increasing dividends. Dividend Aristocrats, for example, are companies that have increased their dividends for at least 25 consecutive years. They offer a blend of growth and income that appeals to long-term investors.

Key Tip: Dividends can also be reinvested into buying more shares, leading to compound growth. This is often referred to as a dividend reinvestment plan (DRIP).

Company	Dividend Yield (%)	Years of Dividend Growth
Coca-Cola (KO)	3.2%	59
Johnson & Johnson (JNJ)	2.7%	60
Procter & Gamble (PG)	2.4%	66

2. Capital Gains: The Wealth Builder

While dividends provide steady income, capital gains are where most shareholders see significant growth. Capital gains occur when the value of a stock increases, allowing shareholders to sell their shares for a higher price than they paid. For instance, if you bought Apple stock at $50 per share and later sold it at $150, the $100 per share increase is your capital gain.

• What drives capital gains? Several factors contribute to a stock's price increase: company growth, strong earnings reports, industry trends, or even general market optimism. For instance, tech companies like Amazon and Tesla have seen substantial stock price appreciation over the past decade due to rapid innovation and market expansion.

• Short-term vs. long-term capital gains: Capital gains can be short-term or long-term, depending on how long you hold the stock before selling. Short-term capital gains (on stocks held for less than a year) are taxed at your ordinary income rate, while long-term capital gains (on stocks held for over a year) are taxed at a lower rate, making long-term investing more tax-efficient.

Key Tip: Timing is everything with capital gains. Holding stocks for the long term not only benefits from lower taxes but also allows you to ride out market volatility.

3. Stock Buybacks: An Under-the-Radar Profit Machine

Another way shareholders benefit is through stock buybacks. When a company buys back its own shares, it reduces the number of shares available in the market, which increases the value of the remaining shares. This is because fewer shares mean each share represents a larger portion of ownership in the company.

• Why do companies buy back shares? Companies often initiate buybacks when they believe their stock is undervalued or to return excess cash to shareholders. A buyback signals confidence in the company's future and can lead to higher stock prices, benefiting shareholders who hold onto their shares.

• Example of successful buybacks: Apple has repurchased billions of dollars' worth of its own shares over the years, contributing to the stock's significant price appreciation. Warren Buffett, the legendary investor, has been a big fan of Apple, in part due to its aggressive buyback strategy.

Key Tip: Keep an eye on companies with consistent buyback programs, as this often reflects management’s belief in the company’s long-term growth prospects.

4. Special Dividends: A Nice Surprise

In addition to regular dividends, shareholders can sometimes benefit from special dividends. These are one-time payments made by a company to distribute excess profits. While not as predictable as regular dividends, they can provide a significant windfall for shareholders when they do occur.

• Why do companies issue special dividends? Sometimes, a company will accumulate more cash than it needs for operations or expansion. Rather than sitting on this cash, they return it to shareholders. These special dividends are often paid after an asset sale, a particularly profitable year, or when the company has excess liquidity.

• Example of special dividends: In 2020, Costco paid a special dividend of $10 per share, which amounted to a $4.4 billion payout to shareholders. It was a one-time reward for long-term investors.

5. Spin-Offs: A Hidden Treasure

Spin-offs occur when a company creates a new, independent company by distributing shares of the new company to its existing shareholders. Shareholders benefit because they end up owning shares in two companies—the original one and the newly formed spin-off—without having to invest additional money.

• Why do spin-offs happen? Companies spin off divisions that they believe will perform better as independent entities. Spin-offs can unlock value by allowing each business to focus on its core operations and growth strategies.

• Example of a successful spin-off: PayPal was spun off from eBay in 2015, and both companies have seen significant growth since. PayPal's stock price has skyrocketed, benefiting both original eBay shareholders and new PayPal shareholders.

Key Tip: Keep an eye on companies planning spin-offs, as these events often lead to significant stock price movements and provide unique opportunities for investors.

6. Stock Splits: Psychological Profit Boost

While stock splits don’t directly increase shareholder wealth, they can lead to a higher stock price in the long term due to increased liquidity and accessibility. A stock split occurs when a company divides its existing shares into multiple shares to lower the price per share, making it more affordable for smaller investors.

• Why do stock splits happen? Stock splits make shares more affordable and can increase demand for the stock, potentially driving up the price. Tesla’s 5-for-1 stock split in 2020, for example, helped attract a broader range of investors, contributing to its stock price doubling shortly after the split.

Key Tip: Keep an eye on stock splits, especially in high-growth companies. While the split itself doesn’t add value, the increased investor interest often drives the stock price higher.

Conclusion

Shareholders have multiple avenues to make money from their investments, whether through steady income from dividends, capital gains from stock price appreciation, or hidden gems like buybacks and spin-offs. Understanding these strategies is crucial for anyone looking to build wealth in the stock market. Long-term success often comes down to patience, research, and taking advantage of these key methods for growing your investment.

Key Action Step: To maximize returns, diversify your portfolio across dividend-paying stocks, growth stocks, and companies with strong buyback programs or upcoming spin-offs. Be mindful of tax strategies, reinvest dividends, and hold for the long term to capitalize on both income and growth.