Dividends: getting paid to own
Some companies send you cash just for owning their shares. Here's how it really works.
What a dividend is
A dividend is a payment a company makes to shareholders, usually from its profits. Many US companies that pay dividends do so every quarter. Not all companies pay them: many fast-growing companies prefer to reinvest profits in the business instead.
The dividend yield is the yearly dividend divided by the share price. A $100 stock paying $3 a year has a 3% yield.
Dividends aren't free money
When a dividend is paid, cash leaves the company, so the company is worth a little less. That's why a stock's price typically drops by about the dividend amount on the ex-dividend date, the cutoff for qualifying. You must own the shares before that date to get the payment.
Dividends are one way a company returns value; a rising share price is another. What matters is your total return: price change plus dividends.
Watch out for very high yields
A very high yield can be a warning sign. Yield rises when the price falls, so a sky-high yield sometimes means investors fear the company is in trouble and might cut the dividend. Dividends are never guaranteed and can be reduced or stopped.
You can usually choose to reinvest dividends automatically, buying more shares, which lets compounding work. In taxable accounts, dividends are usually taxed, and rules differ by country.
You own 50 shares of a $40 stock: $2,000 invested. It pays $0.40 per share each quarter, which is $1.60 a year.
Yearly dividends: 50 x $1.60 = $80. Dividend yield: $1.60 / $40 = 4%.
If the price also rises to $42 over the year, your shares gain $100. Total return: $100 + $80 = $180, or 9% of $2,000.
Key terms
- Dividend
- A cash payment from a company to its shareholders.
- Dividend yield
- The yearly dividend divided by the share price, shown as a percentage.
- Ex-dividend date
- The cutoff date: you must own the shares before it to receive the next dividend.
- Total return
- Price change plus dividends, the full picture of what an investment earned.
Judge an investment by total return, not dividend yield alone.