8. What is a dividend?
A dividend is a portion of a company's profits that is paid out to its shareholders as a reward for their investment. When a company does well and makes money, its board of directors can choose to share some of those earnings with the people who own pieces (shares) of the company. [1, 2]
How it Works
- Payment Types: Dividends are usually paid in cash directly into your brokerage account, but they can also be paid as additional shares of stock.
- Payout Schedule: Companies often pay dividends on a set schedule, such as every three months (quarterly).
- The Math: Payments are made on a "per-share" basis. If a company pays $1 per share and you own 50 shares, you get $50. [2, 3, 4, 5]
Why Companies Pay Them
- To thank investors and share business success.
- To show that the company is financially stable and healthy. [6, 7]
What You Can Do With Dividends
- Cash out: Use the money as regular income.
- Reinvest: Buy more shares of the company to grow your investment faster. [6]
Important Terms to Know
- Dividend Yield: A percentage that tells you how much a company pays out each year compared to its current stock price.
- Ex-Dividend Date: The cutoff day to buy a stock. You must own the stock before this date to get the upcoming dividend. [2, 3, 8]
Learn more about how companies manage their earnings on Investopedia.
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