What does “a stock pays a dividend of 3%” mean?
It means a 3% return on the value of the stock. If a stock has a $10 share price, the dividend would be $0.30. Normally though, the dividends are announced as a fixed amount per share, because the share price fluctuates. If a percentage were announced, then the final cost would not be known as the share priced could change radically before the dividend date.
"One way to value companies is to use a Dividend discount model. In substance, it consists in estimating future dividends and calculating their present value. So it is a methodology which considers that an equity is similar to a bond and estimates its current value based on future cash flows. A company may not be paying dividends now, but because its future earnings prospects are good may pay some in the future. In that case the DDM model will give a non-zero value to that stock. If on the other hand you think a company won't ever make any profits and therefore never pay any dividends, then it's probably worth 0! Take Microsoft as an example - it currently pays ~3% dividend per annum. The stock has been listed since 1986 and yet it did not pay any dividends until 2003. But the stock has been rising regularly since the beginning because people had ""priced in"" the fact that there was a high chance that the company would become very profitable - which proved true in the long term (+60,000% including dividends since the IPO!)." "While nothing is guaranteed - any stock market or country could collapse tomorrow - if you have a fairly long window (15+ years is certainly long), ETFs are likely to earn you well above inflation.  Looking at long term ETFs, you typically see close to 10% annual growth over almost any ten year period in the US, and while I don't know European indexes, they're probably well above inflation at least. The downside of ETFs is that your money is somewhat less liquid than in a savings account, and any given year you might not earn anything - you easily could lose money in a particular year.  As such, you shouldn't have money in ETFs that you expect to use in the next few months or year or even a few years, perhaps. But as long as you're willing to play the long game - ie, invest in ETF, don't touch it for 15 years except to reinvest the dividends - as long as you go with someone like Vanguard, and use a very low expense ratio fund (mine are 0.06% and 0.10%, I believe), you are likely in the long term to come out ahead.  You can diversify your holdings - hold 10% to 20% in bond funds, for example - if you're concerned about risk; look at how some of the ""Target"" retirement funds allocate their investments to see how diversification can work [Target retirement funds assume high risk tolerance far out and then as the age grows the risk tolerance drops; don't invest in them, but it can be a good example of how to do it.]   All of this does require a tolerance of risk, though, and you have to be able to not touch your funds even if they go down - studies have repeatedly shown that trying to time the market is a net loss for most people, and the best thing you can do when your (diverse) investments go down is stay neutral (talking about large funds here and not individual stocks). I think this answers 3 and 4.   For 1, share price AND quantity matter (assuming no splits).  This depends somewhat on the fund; but at minimum, funds must dividend to you what they receive as dividends.  There are Dividend focused ETFs, which are an interesting topic in themselves; but a regular ETF doesn't usually have all that large of dividends.  For more information, investopedia has an article on the subject.  Note that there are also capital gains distributions, which are typically distributed to help offset capital gains taxes that may occur from time to time with an ETF.  Those aren't really returns - you may have to hand most or all over to the IRS - so don't consider distributions the same way. The share price tracks the total net asset value of the fund divided by the number of shares (roughly, assuming no supply/demand split).  This should go up as the stocks the ETF owns go up; overall, this is (for non-dividend ETFs) more often the larger volatility both up and down. For Vanguard's S&P500 ETF which you can see here, there were about $3.50 in dividends over 2014, which works out to about a 2% return ($185-$190 share price).  On the other hand, the share price went from around $168 at the beginning of 2014 to $190 at the end of 2014, for a return of 13%.   That was during a 'good' year for the market, of course; there will be years where you get 2-3% in dividends and lose money; in 2011 it opened at 116 and closed the year at 115 (I don't have the dividend for that year; certainly lower than 3.5% I'd think, but likely nonzero.) The one caveat here is that you do have stock splits, where they cut the price (say) in half and give you double the shares.  That of course is revenue neutral - you have the same value the day after the split as before, net of market movements. All of this is good from a tax point of view, by the way; changes in price don't hit you until you sell the stock/fund (unless the fund has some capital gains), while dividends and distributions do.  ETFs are seen as 'tax-friendly' for this reason. For 2, Vanguard is pretty good about this (in the US); I wouldn't necessarily invest monthly, but quarterly shouldn't be a problem.  Just pay attention to the fees and figure out what the optimal frequency is (ie, assuming 10% return, what is your break even point).  You would want to have some liquid assets anyway, so allow that liquid amount to rise over the quarter, then invest what you don't immediately see a need to use. You can see here Vanguard in the US has no fees for buying shares, but has a minimum of one share; so if you're buying their S&P500 (VOO), you'd need to wait until you had $200 or so to invest in order to invest additional funds." "A dividend is a cash disbursement from the company.  The value of the company goes down the same amount of the dividend, so it is analogous to having money in a savings account and taking a withdrawal every month.  Obviously you are going to have less in the end than if you just kept the money in the account. suppose that I own 10 different stocks, and don't reinvest dividends, but keep them on account, and each month or two, as I add more money to invest, either in one of my existing stocks, or perhaps something new, I add whichever dividend amount is currently available in cash to my new purchase, would this strategy provide the same results? Roughly, yes.  Reinvesting dividends is essentially buying more stock at the lower price, which is a net zero effect in total balance.  So if you invested in the same stocks, yes you'd be in the same place.  If you invested in different stocks, then you would have a performance difference depending on what you invested in. The risk is the temptation to take the cash dividend and not reinvest it, but take it in cash, thereby reducing your earning power. That is, is there some particular reason that the brokers are recommending automatically reinvesting dividends as opposed to reinvesting them manually, perhaps not always in the same item? I'd like to think that they're looking after your best interest (and they might be), but the cynical part of me thinks that they're either trying to keep your business by increasing your returns, or there's some UK regulation I'm not aware of that requires them to disclose the effect of reinvesting dividends.    £100 invested in the UK stock market since 1899 would have grown into just £177 after adjusting for inflation. This figure seems ludicrous to me.  I haven't actually measured what the historical returns on the ""UK market"" are, but that would mean an annualized return (adjusted for inflation) of just 0.5%.  Either UK stocks pay a ridiculous amount of dividends or there's something wrong with the math. EDIT I still have not found a definitive source for the real UK market return, but according to this inflation calculator, £100 in 1899 would equate to almost £12,000 today, for an average inflation rate of 4.14 percent, which would put the CAGR of the UK market at about 4.9%, which seems reasonable.  The CAGR with dividend reinvestment would then be about 9.1%, making dividend reinvestment a no-brainer in the UK market at least." "What you are describing is a very specific case of the more general principle of how dividend payments work. Broadly speaking, if you own common shares in a corporation, you are a part owner of that corporation; you have the right to a % of all of that corporation's assets. The value in having that right is ultimately because the corporation will pay you dividends while it operates, and perhaps a final dividend when it liquidates at the end of its life. This is why your shares have value - because they give you ownership of the business itself. Now, assume you own 1k shares in a company with 100M shares, worth a total of $5B. You own 0.001% of the company, and each of your shares is worth $50; the total value of all your shares is $50k. Assume further that the value of the company includes $1B in cash. If the company pays out a dividend of $1B, it will now be only worth $4B. Your shares have just gone down in value by 20%! But, you have a right to 0.001% of the dividend, which equals a $10k cash payment to you. Your personal holdings are now $40k worth of shares, plus $10k in cash. Except for taxes, financial theory states that whether a corporation pays a dividend or not should not impact the value to the individual shareholder.  The difference between a regular corporation and a mutual fund, is that the mutual fund is actually a pool of various investments, and it reports a breakdown of that pool to you in a different way. If you own shares directly in a corporation, the dividends you receive are called 'dividends', even if you bought them 1 minute before the ex-dividend date. But a payment from a mutual fund can be divided between, for example, a flow through of dividends, interest, or a return of capital. If you 'looked inside' your mutual fund you when you bought it, you would see that 40% of its value comes from stock A, 20% comes from stock B, etc etc., including maybe 1% of the value coming from a pile of cash the fund owns at the time you bought your units.  In theory the mutual fund could set aside the cash it holds for current owners only, but then it would need to track everyone's cash-ownership on an individual basis, and there would be thousands of different 'unit classes' based on timing. For simplicity, the mutual fund just says ""yes, when you bought $50k in units, we were 1/3 of the year towards paying out a $10k dividend. So of that $10k dividend, $3,333k of it is assumed to have been cash at the time you bought your shares. Instead of being an actual 'dividend', it is simply a return of capital.""  By doing this, the mutual fund is able to pay you your owed dividend [otherwise you would still have the same number of units but no cash, meaning you would lose overall value], without forcing you to be taxed on that payment. If the mutual fund didn't do this separate reporting, you would have paid $50k to buy $46,667k of shares and $3,333k of cash, and then you would have paid tax on that cash when it was returned to you. Note that this does not ""falsely exaggerate the investment return"", because a return of capital is not earnings; that's why it is reported separately.  Note that a 'close-ended fund' is not a mutual fund, it is actually a single corporation. You own units in a mutual fund, giving you the rights to a proportion of all the fund's various investments. You own shares in a close-ended fund, just as you would own shares in any other corporation. The mutual fund passes along the interest, dividends, etc. from its investments on to you; the close-ended fund may pay dividends directly to its shareholders, based on its own internal dividend policy." I am also confused by what he says. The DJIA has not been at 900 for decades. However a $36 dividend is 4% per unit if you get $9 per unit per quarter. 2/3 of 4% is 6%,so that is inside his 7.5% to 5.5%. How much you have in dividend paying stocks vs. Bonds most often is a function of your age. For example, I have heard the advice of subtracting your age in years from 110 and that would be the percent you hold in dividend paying stocks. At age 30 you would have 80% in stocks. At age 60 you would be 50% in stocks. There are retirement funds that do this for you.  But the 'bottom line' all depends on your risk tolerance. I have a large tolerance for risk. So even though I am currently retired I only have 10% of my money in a 'safe' investment (ticker=PGF). It pays 5.5% per year.  The rest is in a leveraged junk bond fund (PHK) that pays 15.5% per year. A share is just a part ownership of a company. If you buy a share of a green stock in the open market, you now just own  part of a green company. Just like if you buy a house, the money you paid moves to the former owner, but what you are getting is a clear asset in return that you now own. Via mutual funds/indexes this can get a little more complicated (voting rights etc tend to go to the mutual/indexing company rather than the holders of the fund), but is approximately the same thing: the fund buys assets on the open market, then holds them, buys more, or sells them on behalf of the fund investors. Many brokerages offer automatic dividend reinvestment. It is very infrequent that these dividends are exactly a whole share. So, if you have signed up for automatic dividend reinvestment, many brokerages will reinvest your dividends and assign to you a fractional share. I can't speak for how these shares work with regards to voting, but I can say that the value of these fractional holdings does change with stock price as if one genuinely could hold a fraction of a share. This is called the gordon growth model (or dividend discount model).  This is one way to value a stock, but in practice no one uses it because the assumptions are that companies will return value to investors solely via regular dividends, and that the growth rate and the required rate of return from investors are constants; among other issues.