What a dividend is
A dividend is cash a company pays to its shareholders out of profit. Here is how dividends work, what yield means, and the dates that matter.
Some companies share part of their profit with the people who own their shares. That payment is called a dividend. It is one of the two ways a shareholder can make money, along with a rise in the share price.
How it works
A company makes a profit. Its board of directors decides how much to keep for the business and how much, if any, to pay out.
The dividend is set as an amount per share. If a company pays $0.50 per share and you own 100 shares, you receive $50.
Many North American companies pay dividends every three months. Some pay monthly or once a year.
Not every company pays one
Dividends are common among large, steady businesses such as banks, utilities and telecom companies. Many fast-growing companies pay nothing. They prefer to put their profit back into the business to grow faster.
Neither approach is automatically better. A company that pays no dividend can still be a good business, and a dividend payer can still struggle.
Dividend yield
The yield compares the yearly dividend with the share price. It is shown as a percentage.
If a share costs $50 and pays $2 a year in dividends, the yield is 4%.
Be careful with a very high yield. Yield rises when the share price falls. A high yield can be a sign that investors expect the dividend to be cut.
Dividends can change
A dividend is not a promise. Companies can raise it, cut it or stop it. Cuts often happen when profits fall, and the share price usually drops on the news.
The dates that matter
- Declaration date. The company announces the dividend.
- Ex-dividend date. You must own the shares before this date to get the payment. Buy on or after it and the seller gets the dividend.
- Payment date. The cash arrives in your account.
On the ex-dividend date, the share price usually drops by roughly the amount of the dividend, because new buyers will not receive it.
Reinvesting
Many brokers offer a dividend reinvestment plan, or DRIP. Instead of taking the cash, you use it to buy more shares automatically. Over many years, this can add a lot to your total return.
Many ETFs also pass on the dividends of the companies they hold.
Taxes
Dividends are usually taxed, though the rules differ by country and by account. In Canada, dividends from Canadian companies can qualify for a dividend tax credit. Tax-sheltered accounts change the picture in both countries.
The short version
- A dividend is a cash payment from a company to its shareholders.
- Yield is the yearly dividend divided by the share price.
- A very high yield can be a warning sign, not a bargain.
- You must own the shares before the ex-dividend date to get paid.
This is general information, not investment advice.
Updated