Starting out
Dividend
A cash payment a company makes to its shareholders out of its profits.
How it works
Dividends are decided by the board, not owed. They can be raised, held, cut or scrapped, and a company under pressure will usually protect the business before the payout.
A dividend is not free money. When a company pays out cash, the cash leaves the business, and in theory the share price drops by roughly the amount paid on the ex-dividend date. What you gain in cash you give up in share value.
Where it misleads people
A very high yield is usually a warning rather than a bargain. Yield rises when the price falls, so the most attractive-looking yields often belong to companies the market expects to cut the payment.
Worked example
A company paying a $0.50 quarterly dividend on a $40 share is distributing $2 a year, a yield of 5% at that price.
Related terms
- Dividend yieldAnnual dividends per share as a percentage of the share price.
- Ex-dividend dateThe first day a share trades without the right to the next dividend.
- Payout ratioThe share of earnings a company pays out as dividends rather than reinvesting.
- Dividend cutA company reducing or suspending its dividend.
- Share buybackA company buying its own shares in the market, reducing the number in issue.
Mentioned in
More in Starting out
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.