Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:

  1. Dividends.
  2. Earnings growth.
  3. Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, Colgate-Palmolive (NYSE: CL).

Colgate shares returned 90% over the past decade. How'd they get there?

Dividends provided nearly half the return. Without dividends, shares returned 54% over the past 10 years.

Earnings growth was surprisingly strong. Colgate's normalized earnings per share grew an by average of 11.2% per year from 2001 until today -- well above the market average, and impressive given the encroaching competition from generic store brands sold by companies like Costco (Nasdaq: COST).

But if Colgate's earnings grew by over 11% per year, why were shareholder returns so much less? This chart helps explain why:

Source: S&P Capital IQ.

At over 30 times earnings, Colgate shares were clearly overvalued 10 years ago. The decline in valuation multiples ever since has prevented part of the company's earnings growth from turning into shareholder returns. The same was true at rivals Procter & Gamble (NYSE: PG) and Clorox (NYSE: CLX) -- strong earnings growth was suppressed by collapsing valuation multiples.

The good news today is that, at around 18 times earnings, Colgate shares aren't unreasonably valued, particularly given the strength of its earnings growth. Going forward, far more of the company's earnings growth should translate into shareholder returns.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

Fool contributor Morgan Housel owns shares of Procter & Gamble. Follow him on Twitter @TMFHousel. Click here to see his holdings and a short bio. The Motley Fool owns shares of Clorox and Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Clorox, Costco Wholesale, and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.