What is a Dividend?
Understand how companies share profits with shareholders through dividend payments.
Quick Answer
A dividend is a cash payment that a company makes to its shareholders from its profits. Think of it as a "thank you" payment for owning shares in the company. If you own 100 shares of a stock that pays a $1 annual dividend, you'll receive $100 per year, typically paid quarterly ($25 every 3 months).
Why Dividends Matter
Passive Income Stream
Dividends provide regular cash payments without having to sell your shares. Many investors build portfolios that generate thousands per month in dividend income.
Sign of Company Health
Companies that pay consistent dividends are usually profitable and financially stable. Some companies have paid increasing dividends for 50+ years straight.
Total Returns
Dividends can account for 30-40% of long-term stock returns. A stock might grow 6% annually, but with a 3% dividend, your total return is 9%.
How Dividends Work: Step by Step
Company Declares Dividend
The board of directors announces a dividend payment. Example: "We'll pay $0.50 per share on March 15."
Ex-Dividend Date
You must own the stock before this date to receive the dividend. If you buy after this date, you won't get the payment.
Record Date
The company checks its records to see who owns shares and is eligible for the dividend.
Payment Date
The dividend money appears in your brokerage account. You can withdraw it or reinvest it.
Real Example: Coca-Cola Dividend
Your Investment
You buy: 100 shares of Coca-Cola (KO)
Stock price: $60 per share
Total investment: $6,000
Dividend Payment
Quarterly dividend: $0.46 per share
You receive: $46 every 3 months
Annual dividend income: $184 per year
Your Return
Dividend yield: 3.07% ($184 ÷ $6,000)
This is income you earn just for holding the stock, regardless of price changes!
Understanding Dividend Yield
Dividend yield tells you how much annual income you'll earn relative to the stock price:
Dividend Yield = (Annual Dividend ÷ Stock Price) × 100
Low Yield (0-2%)
Growth companies like Apple, Google. They reinvest profits instead of paying high dividends.
Moderate Yield (2-4%)
Balanced companies like Coca-Cola, Johnson & Johnson. Steady income with some growth.
High Yield (4%+)
Income-focused companies like REITs, utilities. High income but slower growth (or sometimes warning sign).
Famous Dividend-Paying Stocks
Johnson & Johnson (JNJ)
~2.8% yieldHas increased its dividend every year for over 60 years. Known as a "Dividend Aristocrat."
Healthcare • Extremely Reliable
AT&T (T)
~6.5% yieldTelecommunications giant with a high dividend yield, popular among income investors.
Telecom • High Income
Realty Income (O)
~5.2% yieldA Real Estate Investment Trust (REIT) that pays monthly dividends. Known as "The Monthly Dividend Company."
Real Estate • Monthly Payments
DRIP: Dividend Reinvestment Plans
A DRIP automatically uses your dividend payments to buy more shares of the same stock. This compounds your returns over time.
Example: 20 Years of Reinvesting
Without reinvesting dividends, you'd only have $38,697. The extra $4,522 is from compounding!
Common Questions About Dividends
Do all stocks pay dividends?
No. Growth companies like Tesla, Amazon, and Netflix don't pay dividends. They reinvest profits to grow the business. Mature companies like Coca-Cola and McDonald's typically pay dividends.
Are dividends guaranteed?
No. Companies can reduce or eliminate dividends if they face financial difficulties. During the 2008 financial crisis and 2020 pandemic, many companies cut dividends.
Do I pay taxes on dividends?
Yes. "Qualified dividends" are taxed at 0%, 15%, or 20% depending on your income (lower than regular income tax). Dividends in retirement accounts (IRA, 401k) aren't taxed until withdrawal.
Is a higher dividend yield always better?
Not necessarily. Very high yields (8%+) can be a warning sign that the stock price has dropped due to company problems. Focus on dividend sustainability, not just yield.
Key Takeaways
- ✓Dividends are cash payments companies make to shareholders from profits
- ✓Most dividends are paid quarterly (every 3 months)
- ✓Dividend yield shows annual income as a percentage of stock price
- ✓Reinvesting dividends (DRIP) compounds your returns over time
- ✓Consistent dividend growth is a sign of financial health