Prices are largely driven by corporate earnings and the level of dividends paid to shareholders. Institutional forces, such as mutual fund demand for particular stocks at any moment, and a host of psychological factors can either boost or depress stock prices. At times investor demand drives prices beyond reasonable valuations, while at other times investor disinterest pushes stock prices lower and lower. The political climate is also a major influence on stock prices, as is the general state of the economy, the level of interest rates, and the attractiveness of competing investments. Investors should not ignore the power of dividends in overall stock market performance, since dividends are a guarantee that one of the two components of investment returns will be positive.
Dividends also serve as a protective cushion when the overall market is declining.
The compounding effect of dividends over time is even more impressive. Of course, not all stocks pay dividends, and dividend levels may fluctuate. Stock analysts and investors review certain measures of value to arrive at what they think is a reasonable price for a stock or for stocks in general. The stock appears undervalued based on this measure, but other data have to be considered to be sure it is a good buy. This measure gives you the percentage income return on your investment.