What is a Dividend?

A dividend is a portion of a company's profits paid out directly to its shareholders. It is one of the two main ways you can make money from owning stocks. The other being an increase in the share price itself.

How do dividends work?

When a company generates profit, it has a choice. It can reinvest that money into the business to fund growth, or it can return some of it to shareholders as a dividend. Companies that pay dividends typically do so on a regular schedule, quarterly or annually. The amount is expressed either as a fixed sum per share or as a yield, which is the dividend as a percentage of the share price.

Which companies pay dividends?

Established, profitable companies with stable earnings tend to pay dividends. Banks, utilities, consumer goods companies, and large industrials are common examples. Fast-growing companies particularly in technology often reinvest all their profits rather than paying dividends, preferring to use the money to fund expansion.

What are dividends reinvested?

Many brokers offer a dividend reinvestment option, often called DRIP. Instead of receiving your dividend as cash, it is automatically used to buy more shares of the same company or fund. Over time this accelerates the compounding of your investment significantly.

Are dividends guaranteed?

No. A company can reduce or eliminate its dividend at any time, particularly during periods of financial difficulty. A high dividend yield can sometimes be a warning sign rather than an attraction. It may indicate the market expects the dividend to be cut, or that the share price has fallen sharply for a reason.