What Are Dividends?

Earning Income from Company Profits

Introduction

A dividend is a portion of a company’s profits that is distributed to its shareholders.

When a company performs well and generates consistent earnings, it may choose to share part of those profits with investors.

Dividends provide a way to earn income in addition to potential stock price growth.

How Dividends Work

If you own shares in a company that declares a dividend:

  • You receive a payment per share
  • Payments are usually made quarterly
  • The amount depends on company policy

For example:

If a company pays $1 per share annually
And you own 100 shares

You would receive $100 per year (before taxes).

Why Do Companies Pay Dividends?

Companies may pay dividends to:

  • Reward shareholders
  • Attract long-term investors
  • Demonstrate financial strength
  • Signal stable earnings

Dividend-paying companies are often mature and profitable.

Types of Dividends

🔹 Cash Dividends

The most common form.
Paid directly into your brokerage account.

🔹 Stock Dividends

Instead of cash, shareholders receive additional shares.

🔹 Special Dividends

One-time payments issued during exceptional profit periods.

What Is Dividend Yield?

Dividend yield measures how much income you receive relative to the stock price.

Formula:

Dividend Yield = Annual Dividend ÷ Share Price

Example:

If a stock costs $50
And pays $2 annually

Dividend Yield = 4%

Higher yield does not always mean better investment. Stability matters.

Do All Companies Pay Dividends?

No.

Many growth companies reinvest profits into:

  • Expansion
  • Innovation
  • Acquisitions

Instead of paying dividends, they focus on increasing share value.

Risks of Dividend Investing

  • Dividends can be reduced or eliminated
  • High yield may signal financial trouble
  • Share price may decline

Dividend income is not guaranteed.

Final Thoughts

Dividends provide an additional income stream for investors.

They are particularly attractive to long-term and income-focused investors. However, dividend decisions should always consider overall company health and sustainability.