After two years of saving and working extra hours, you’ve finally built up enough money to start investing beyond your retirement accounts. You just spent the afternoon with your new broker, going through many investment options. They explained each one in detail, and by the end of the meeting, your head is spinning from all the information.

Your broker gave you several sample scenarios showing how much return you could expect from different choices. In the end, you decided to buy some stock in a local company you know a bit about.

But as you drive away from their office, you find yourself thinking, “What am I actually going to get from this investment, and how will I get it?”

Key Points to Remember

When looking at how well an investment performs, it’s easy to focus only on how much its price has gone up or down.
But investments can give you value in other ways too—such as interest payments, dividends, and even tax benefits.
Instead of only looking at price changes, you should also consider all these sources of value. This full picture is called an investment’s total return.

Interest

Interest is the income you earn from lending your money through certain types of investments. It’s paid in return for letting someone else—like a company or bank—use your money.

You can earn interest from several kinds of investments, such as:

• Fixed-income securities like bonds and certificates of deposit (CDs). These pay a set interest rate until they mature or are redeemed.
  
• Bank accounts such as savings, checking, or money market accounts. You earn interest for keeping your money in these accounts.
  
• Fixed annuities, which pay interest that builds up without being taxed until maturity.
  
• Seller-financed mortgages, where the seller lends money to the buyer and charges interest.
  
• Mutual funds that hold any of the above investment types.
  

Equity investments like stocks do not pay interest. Each type of debt investment usually pays a stated interest rate. Some are fixed, while others may vary depending on the agreement.

Interest rates on bank accounts often change based on the market. But bonds, CDs, and annuities usually have a fixed rate until they mature. While interest-paying investments provide stable income, they may not keep up with inflation unless they carry more risk—like high-yield (junk) bonds.

Most interest-paying investments are rated for quality by agencies like Standard & Poor’s (S&P), using grades like AAA or BB. If the rating goes down, it may be a sign the issuer could miss a payment. Other warning signs include falling profits or poor cash flow. A lower rating often follows these issues.

Dividends

Dividends are payments made to shareholders from a company’s profits. These are usually paid monthly or quarterly and are a common way stockholders earn income.

Like interest, dividend payments are often set for a specific time. But dividends are only paid on stocks or mutual funds that invest in stocks—not all stocks offer dividends. Generally, larger and more stable companies pay dividends, while smaller firms often keep their profits to help grow the business.

Dividends can come from both common and preferred stocks. Preferred stocks often have higher dividend rates. Dividends can also be classified as either ordinary (taxed like regular income) or qualified (taxed at lower capital gains rates).

Most companies are not required to pay dividends on common stock. If a company is not doing well financially, it may reduce or stop its dividend payments.

Dividend yields vary depending on the type of stock. Common stock dividends usually change based on the company’s earnings, while preferred stock dividends are more connected to current interest rates. Since preferred stocks are riskier than bonds, they generally pay higher dividends than CDs or regular bonds (except junk bonds).

Capital Gains

Capital gains are the profits made when the value of an investment increases from the time you bought it to the time you sell it. If you hold the investment for more than a year, it’s a long-term gain. If less than a year, it’s a short-term gain.

Both stocks and bonds can earn capital gains or losses. Bonds are mainly designed to pay interest, but their prices can rise too. Stocks and real estate, however, often earn most of their return through capital gains.

Over the long term, capital gains from stocks and real estate have usually outpaced inflation, making them strong investment choices. But markets can go up or down, and the same investment that gains can also lose value. Stock prices change based on the overall market and how well a company performs.

Tax Advantages

Some investments offer tax benefits. For example:

• Oil and gas investments may give you up to 15% tax-free income through something called a depletion allowance.
  
• Limited partnerships, often used for real estate or energy projects, pass through earnings that you didn’t actively help manage. These are known as passive income.
  
• Passive income from partnerships can often be reduced by passive losses, which are usually the costs of running the business.
  

Total Return

Many investments give you more than just one type of return. For example:

• Stocks can pay both dividends and offer capital gains.
  
• Bonds may pay interest and also rise in value.
  
• Partnerships might provide any mix of income, capital gains, and tax savings.
  

To understand the full value of an investment, add up all income—interest, dividends, and capital gains—and include any tax savings. This complete picture is your investment’s total return.

Final Thoughts

Every investment has its own way of earning money. Some provide steady income through interest or dividends. Others offer the chance for growth through rising prices. Some even include tax breaks. To fully understand how your money is working for you, you need to consider all these parts together as your total return.