Historically, over the long term, stocks have trended upward. So investing in something that gives you exposure to the market at a low cost and holding for decades is never a bad idea.

If you want to be a little more hands-on with your portfolio, though, understanding where returns come from can make you a smarter investor.

Generally speaking, you can break down stock market returns into three major segments: earnings growth, multiple expansion and dividend payouts. Parse historical market returns, and you’ll see that these three factors can work in unison or at cross purposes.

Here’s how each of the three drivers work and how they affect your money.

Corporate earnings are the fundamental force behind stock returns. At its core, investing in a stock is buying a stake in a company’s profits.

“If I buy a stock, how do I make money? Basically you make money if the company makes money,” says Sam Stovall, chief investment strategist at CFRA. “So the first thing of importance is to ask yourself what kind of earnings growth is the company likely to experience?”

Absent other factors, a boost in earnings should directly result in a commensurate uptick in share price. Say a stock costs $10 per share and has earnings of $1 per share. If earnings grew by 10%, to $1.10 per share, the stock price should grow by 10%, too, to $11.

The lesson: Pay attention to projected growth in corporate earnings. A company or index that steadily boosts earnings is one that is likely to deliver returns to shareholders over time.

“Earnings growth is the driver, in a sense, of what you’re being paid to own these stocks,” says Stovall.

Look at the chart above, and you might notice something odd. There are certain years, such as 1991, where earnings declined, but the stock market still produced a positive return. So what gives?

Here’s the thing — investors don’t pay for past earnings. They’re investing with an eye toward future earnings. The more they think profitability will climb in the future, the more they’re willing to buy into the stock, thereby driving up the price.

Investing nerds have many ways to measure this phenomenon, the most popular of which is the price-to-earnings ratio.

Think of it like the price-per-square foot on a home, suggests Stovall. If you want an apartment in a trendy neighborhood everyone likes, you’ll generally have to pay more for the same amount of space.

Let’s go back to our $10 stock, which we’ll now say belongs to a company with exciting new AI technology. They’re only earning $1 per share now, meaning they have a P/E ratio of 10. But investors think those earnings are going to explode in coming years, so they bid the stock price up to $15. You’ve earned a 50% return, and the P/E ratio is now 15.

The lesson: Get to know valuations. “You can’t know if something is expensive or cheap if you don’t look at the range it normally trades in,” says Stovall.

Savvy investors generally compare a stock’s P/E with its historical averages as well as with peer companies to determine whether it might be over or undervalued. Same goes for market sectors and even whole indexes.

Just because the market is trading richly compared to historical averages doesn’t mean it’s necessarily going to plummet, says Stovall. But it’s worth keeping tabs on what your investments actually cost – especially since the ones with sky-high price tags tend to carry more risk.

“P/E might not be a good market timing tool, but it gives you a good idea as to whether you are overpaying for something or if something is trading at an attractive price,” he says.

If a company has excess profits, it may distribute some of that money back to shareholders as a sort of thank you. These cash payouts are known as dividends — the third building block of stock returns.

The amount a company pays out is known as the dividend “yield,” found by dividing the annual cash payout per share by the share price. If our $10 stock paid a 20-cent annual dividend, it would yield 2%. Invest than 20 cents back into your original holding, and you’re up to $10.20, a 2% return.

Dividend yield makes up the shortest bars on the graph above, but, crucially, it’s always positive. That’s why the compounding growth of reinvested dividends has had an outsize impact on the broad stock market’s return over the long term. Since 1960, compounding dividends have accounted for 85% of the S&P 500′s total return, according to Hartford Funds.

The lesson: Dividends can act as a portfolio ballast. Play around with the equations above, and you’ll notice that as stock prices fall, dividend yields increase. That means, on a market-wide level, dividends can help offset the losses that come with declining earnings or contracting P/Es.

What’s more, dividend-payers — especially those with a long-track record of increasing their payout — tend to be well capitalized, financially mature companies, which bounce around less than the broad market, says Stovall. Adding these steady-Eddies to your investments can help tamp down on jumpiness in your portfolio.

“Those companies that pay a dividend tend to have lower volatility than those that don’t,” he says.

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