Question

What are the two sources of cash flow for a common stock investor? Explain your answer

Answer 1

Two sources of cash flow for a common stock investor are -

1) Dividends - Dividends are remaining profits distributed by the company to its investors. This cash flow occurs when the company declares to distribute dividend to its investors. This may be a constant cash flow or it may be very uneven. For example, Company distributes $3 constant dividend every year. Whereas Company B distributes dividend equal to 25% of profits. In the latter case, dividends can be highly uneven as they are dependent on profits.

2) Capital gain / capital appreciation - This cash flow occurs due to appreciation of the price of stocks in the market. For example, an investor purchase a stock for $50. A year later, the price of stock is $70. So, their is a capital gain of $20 for the investor.