The essentials
- A dividend is part of a company's profit paid out to shareholders, usually quarterly or twice a year.
- Yield = annual dividend ÷ share price; a very high yield can signal the market expects a cut.
- Reinvesting dividends has historically made up a large part of long-run stock returns.
How a dividend is paid
The company's board declares a dividend per share. Four dates matter:
| Date | What happens |
|---|---|
| Declaration date | The company announces the amount and dates |
| Ex-dividend date | Buy on or after this date and you won't receive this dividend |
| Record date | The company checks its register of shareholders |
| Payment date | Cash arrives in your account |
On the ex-dividend date the share price typically drops by roughly the dividend amount, because new buyers no longer receive it. The dividend is not free money; it is value moved from the share to your cash balance.
The key numbers
- Dividend yield: a company paying $2 a year with shares at $50 yields 4%.
- Payout ratio: dividends as a share of earnings. A company paying out more than it earns may struggle to keep paying.
- Dividend growth: how quickly the payment has risen over time.
- Dividend cover: earnings divided by dividends; the inverse of the payout ratio.
The high-yield trap
Because yield is dividend divided by price, a falling share price pushes the yield up. A 9% yield may mean investors doubt the dividend will last. If it is cut, the investor can suffer both lower income and a lower share price.
Reinvesting
Many brokers and funds offer automatic reinvestment, buying more shares with each payment. Accumulation versions of funds do this internally. Over decades, reinvested dividends compound, which is why total return indices grow much faster than price-only indices.
Taxes
Dividends may be taxed as income in your country, and foreign dividends may have tax withheld at source. Tax-advantaged accounts can change this. See investing in US stocks for withholding tax basics.
Dividend funds
Funds focused on dividend-paying companies spread risk across many payers, but can be concentrated in particular sectors such as banks, energy and utilities. Check the fund's holdings and costs.
What are dividend aristocrats?
Dividend aristocrats is a name for S&P 500 companies that have raised their dividend every year for at least 25 consecutive years; S&P Dow Jones Indices maintains an index of them. A long record shows discipline, not a guarantee: companies can still cut a dividend. Lists of the best dividend stocks are a starting point for research, not a shortcut past it.
Reader questions
Do all companies pay dividends?
No. Many growth companies reinvest all their profits instead, and some return cash through share buybacks.
Is a dividend guaranteed?
No. Companies can cut or suspend dividends at any time, and many did during past recessions.