Two Ways To Make Money From Stocks

The stock market can feel impossibly complex, but the way it actually pays you is simple. Beneath all the jargon there are only two ways a stock makes you money: the price rising, and dividends. Understanding both, and how they combine into your total return, is the foundation of investing well. This guide explains each one honestly, drawing on the Motley Fool and Invesco.

Only two ways, really

Strip away the jargon and there are only two ways a stock makes you money. The first is capital appreciation: the share price rises, so you can sell for more than you paid, and the difference is your gain. The second is dividends: a share of the company’s profits paid to you, often each quarter, simply for owning the stock. Added together, they form your total return.

The honest framing is that both are real, but neither is guaranteed. Prices fall as well as rise, and dividends can be cut. Growth stocks lean on appreciation while dividend stocks lean on income, and many investors hold both. What matters is understanding which engine you are relying on, thinking in total return, reinvesting dividends, diversifying and minding the tax. Our dividend reinvestment calculator shows what reinvesting does over a longer period. The sections below explain how each engine works and how to use both. This is education, not investment advice.

The two engines of return

The two sources of return are best seen side by side, and the comparison below sets them out. Capital appreciation means the share price rises, you profit when you sell, it is driven by the business growing, and it is the main engine for growth stocks. Dividends are a share of company profits, paid to you for owning, often each quarter, and can be reinvested to compound. One rewards growth; the other rewards ownership.

How capital appreciation works

Capital appreciation follows a simple chain, and the steps below trace it. You buy shares at a price, the business grows, the share price rises as others pay more, your gain sits on paper until you act, and you realise it by selling higher. Until you sell, the gain is unrealised and can still rise or fall.

How dividends work

Dividends work differently, and the summary below gathers the essentials. A dividend is a share of the profits, paid for owning shares, often quarterly, with the yield being the dividend over the price. You can reinvest them to compound, but they are not guaranteed and can be cut. The footer captures their appeal: income for owning, even when prices stay flat.

Growth stocks versus dividend stocks

The two engines map onto two kinds of stock, and the comparison below sets them out. Growth stocks reinvest profits to grow, pay little or no dividend, return mostly through price growth, and offer higher reward with higher risk. Dividend stocks pay out steady dividends, are often mature companies, return through income too, and tend to be steadier and less volatile. Many investors hold both.

Smart habits for both engines

Using both engines well comes down to a few habits, and the panel below gathers them. Focus on total return rather than one source, reinvest dividends to compound, diversify across both kinds, hold for the long term, and mind the tax on gains and dividends. These habits let the two engines work together over time.

An honest bottom line

The honest reality is that, beneath all the noise, stocks make money in only two ways: the share price rising, and dividends. Capital appreciation rewards you when the company grows and you eventually sell for more than you paid; dividends pay you a share of the profits simply for owning the stock, even when the price stands still. Add them together and you have your total return, the only number that captures the full picture of how an investment has done.

What that means in practice is to understand which engine you are relying on and to respect that neither is guaranteed. Growth stocks chase appreciation and carry more volatility; dividend stocks offer steadier income; many sensible portfolios hold both, and reinvested dividends compound quietly over decades. Prices fall as well as rise and dividends can be cut, so diversify, think in total return rather than one source, reinvest what you can, hold for the long term, and remember that both gains and dividends may be taxed. Do that, and the two simple ways stocks make money become a durable way to build wealth. This article is educational information, not investment advice.

Two engines, one total return

The honest way to understand stock returns is as two engines driving one total return. The first, capital appreciation, rewards you when a business grows and its share price climbs, and it is where most of the excitement and most of the volatility live. The second, dividends, pays you quietly for owning a piece of a profitable company, arriving whether the price rises or not, and compounding powerfully when reinvested. Neither is guaranteed, and each suits a different temperament and goal, but the investors who do best rarely obsess over one at the expense of the other. They think in total return, they reinvest what they receive, they diversify so a single cut dividend or falling price cannot derail them, they hold for the long term, and they keep an eye on the tax that decides how much of it they actually keep. Understand the two engines, respect their limits, and let them work together over time. This article is educational information, not investment advice.

Common mistakes about stock returns

These four mistakes come from misunderstanding how the two engines really work.

1. Chasing a high dividend yield alone

Why it backfires: Buying a stock just because its yield looks high ignores that an unusually high yield can signal a payout about to be cut.

Do this instead: Look at whether the dividend is sustainable and growing, not just the headline yield, since a cut dividend and a falling price often arrive together.

2. Ignoring dividends and only chasing price

Why it backfires: Focusing only on price growth overlooks that reinvested dividends have driven a large share of long term returns.

Do this instead: Think in terms of total return, price growth plus dividends, since over decades the income you reinvest can rival the gains you see.

3. Forgetting that neither return is guaranteed

Why it backfires: Assuming prices only rise and dividends always arrive ignores that prices fall and dividends can be suspended.

Do this instead: Diversify and invest for the long term, since spreading your money protects you when one company cuts its dividend or its price drops.

4. Overlooking the tax on each

Why it backfires: Ignoring how gains and dividends are taxed can quietly reduce what you actually keep.

Do this instead: Understand that selling for a gain and receiving dividends can both be taxable, and consider tax advantaged accounts, since what you keep matters more than what you earn.

Frequently asked questions

What are the two ways to make money from stocks?

The two ways are capital appreciation and dividends. Capital appreciation is the profit you make when the share price rises and you sell for more than you paid. Dividends are a share of a company’s profits paid to you for owning the stock, often each quarter. Together they make up your total return, the complete measure of how your investment has performed.

What is the difference between capital gains and dividends?

Capital gains come from the share price rising: you profit only when you sell for more than you paid. Dividends are cash payments a company makes to shareholders from its profits, which you receive simply for owning the stock, even if the price does not move. Capital gains reward growth; dividends reward ownership.

What is total return?

Total return is your capital appreciation and your dividends added together, and it is the most complete measure of how an investment has performed. A stock whose price rose modestly but paid steady dividends can deliver a strong total return, while focusing on price alone can understate how much you actually earned, especially once dividends are reinvested.

Are growth stocks or dividend stocks better?

Neither is universally better; they suit different goals. Growth stocks reinvest profits and aim for price appreciation, offering higher potential returns with more volatility. Dividend stocks pay steady income and tend to be steadier. Younger investors often favour growth, those seeking income favour dividends, and many hold both. The right mix depends on your goals and risk tolerance.

What is a dividend reinvestment plan?

A dividend reinvestment plan, or DRIP, automatically uses your dividends to buy more shares instead of paying you cash. This compounds your returns over time, because the new shares themselves earn dividends and can appreciate. For long term investors who do not need the income now, reinvesting dividends is one of the most powerful ways to build wealth.

Do I pay tax on capital gains and dividends?

Often, yes, depending on your account and where you live. Selling shares for a profit can trigger capital gains tax, and dividends can be taxable even if you reinvest them. Long term gains are frequently taxed more favourably than short term ones. Tax advantaged accounts can help, so it is worth understanding the rules, since what you keep after tax is what counts. This is general education, not investment or tax advice.

Sources

All claims in this article are supported by the sources listed below. Verify details against the originals before making investment decisions.

1. The Motley Fool, How to Invest in Dividend Stocks. Accessed 11 June 2026.
2. Invesco, Dividends and Capital Appreciation: Understanding Total Return. Accessed 11 June 2026.