Dividend
A payment of cash or stock by a company to its shareholders, usually distributed from profits.
Dividend
A dividend is a payment made by a company to its shareholders, usually from profits. Dividends are typically paid quarterly (four times a year) or annually, and are usually cash, though sometimes paid as additional shares (stock dividends).
Example
Johnson & Johnson (JNJ) pays a quarterly dividend of $0.95 per share, which means if you own 100 shares, you receive $95 per quarter, or $380 per year. JNJ has raised its dividend for 60+ years and is called a "dividend aristocrat."
Coca-Cola (KO) pays an annual dividend of around $1.68 per share. If KO trades at $56, the dividend yield is about 3% ($1.68 ÷ $56). An investor who buys 100 shares for $5,600 receives roughly $168 in annual dividends.
How to Interpret It
- Dividend per share: The dollar amount paid per share. Higher is better if the stock price is reasonable.
- Dividend yield: Annual dividend ÷ stock price. Expressed as a percentage. Higher yield attracts income investors, but unusually high yields can signal financial trouble or distress.
- Dividend history: Companies that consistently pay and grow dividends signal financial stability and confidence.
- Payout ratio: Dividend ÷ net income. Lower (30–60%) is safer and more sustainable. Very high ratios (80%+) leave little room for error or reinvestment.
- Ex-dividend date: The date you must own the stock to receive the next dividend. The stock price typically drops by roughly the dividend amount on this date.
- Dividend reinvestment: Many investors and plans automatically reinvest dividends to compound returns over time.
Limitations
- Dividends are not guaranteed. Companies can cut or eliminate dividends if profits decline.
- High dividend yields can be a trap—if the yield is unusually high, the market may be pricing in a dividend cut.
- Buying a stock just before the ex-dividend date then selling after is not a profit—the stock price drops by the dividend amount.
- Dividends are taxed as ordinary income in most cases, reducing after-tax returns.
- Dividend stocks may have slower capital appreciation than growth stocks that reinvest profits into business expansion.
- A company that never pays dividends might be reinvesting profits to grow faster, which could be more valuable long-term.
Related Terms
- Dividend Yield — annual dividend as a percentage of stock price
- Ex-Dividend Date — deadline to own stock to receive dividend
- Payout Ratio — percentage of earnings paid as dividends
- Stock Split — different from dividends; changes share count
- Earnings — profit that funds dividend payments
Frequently Asked Questions
Why do companies pay dividends?
Companies pay dividends to return profit to shareholders, attract income-seeking investors, and signal financial health and confidence. A company that can afford to pay growing dividends suggests stable, profitable operations.
When do you get paid if you own a dividend stock?
Companies set ex-dividend dates. If you own the stock before the ex-date, you receive the dividend. The dividend is usually paid a few weeks after the ex-date. You can own a stock for one day before the ex-date, get the dividend, then sell—but the stock price usually drops by the dividend amount on the ex-date.
What's the difference between dividend yield and payout ratio?
Dividend yield is the annual dividend per share divided by stock price (what you earn as a percentage of your investment). Payout ratio is the percentage of net income paid as dividends. A stock with 4% yield might pay out 60% of earnings.