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Part of the Series Guide to Dividend InvestingIntroduction to Dividend Investing
CURRENT ARTICLEHow Dividends Work
Dividend Investing Strategies & Concepts
Dividends are the percentage of a company's earnings that is paid to its shareholders as their share of the profits. Dividends are generally paid quarterly, with the amount decided by the board of directors based on the company's most recent earnings.
Dividends may be paid in cash or additional shares. When a company announces a dividend, it also will announce the payment date on which the dividend will be paid into the shareholders' accounts.
The dividend yield of a stock is the dividend amount paid per share and is expressed as a percentage of the company's share price, such as 2.5%.
Not all companies pay dividends to the owners of common shares. (Owners of preferred shares are guaranteed a set dividend payment.)
Dividends must be approved by the shareholders by voting rights. Although cash dividends are common, dividends can also be issued as shares of stock.
Various mutual funds and exchange-traded funds (ETFs) also pay dividends.
A dividend is a reward paid to the shareholders for their investment in a company, and it usually is paid out of the company's net profits. Some companies continue to make dividend payments even when their profits don't justify the expense. A steady track record of paying dividends makes stocks more attractive to investors.
Common stock shareholders of dividend-paying companies are eligible to receive a distribution as long as they own the stock before the ex-dividend date. This is essentially a cutoff date for assigning the dividend payment when shares change hands.
Dividends are paid on a schedule picked by the board. They may be paid monthly, quarterly, or annually. For example, Walmart Inc. (WMT) and Unilever (UL) make regular quarterly dividend payments.
Companies can also issue non-recurring special dividends, either individually or in addition to a scheduled dividend. United Bancorp Inc. declared a 15 cents per share special dividend on Feb. 23, 2023.
Larger, established companies with predictable profits are often the best dividend payers. Companies within the following industry sectors maintain a regular record of dividend payments:
Companies structured as master limited partnerships (MLPs) and real estate investment trusts (REITS) are required to make specified distributions to their shareholders.
Funds may also issue regular dividend payments as stated in their investment objectives.
Young, fast-growing companies such as those in the technology and biotechnology sectors may not pay regular dividends since they may be in the early stages of development and retain all of their earnings for research and development, business expansion, and operational activities.
Investors tend to forgive the lack of a dividend if the company's stock price is growing rapidly.
Not surprisingly, once a company begins paying dividends it finds it difficult to reduce or suspend the payments. This is seen as a sign of falling profits, not to mention a loss of income to shareholders.
Dividend payments follow a chronological order of events, and the associated dates are important to determining which shareholders qualify to receive the dividend payment.
A stock's share price will change to reflect a dividend payment.
As an example, a company that is trading at $60 per share declares a $2 dividend. As the news becomes public, the share price may increase by $2 and hit $62.
The stock might trade at $63 one business day before the ex-dividend date. On the ex-dividend date, it's adjusted by $2 and begins trading at $61 at the start of the trading session on the ex-dividend date, because anyone buying on the ex-dividend date will not receive the dividend.
Many investors buy stocks for their dividends rather than for their potential for share price growth. Some extraordinarily successful companies like Coca-Cola Co. are prized more by investors for their steady dividends than for their potential price growth.
Dividends are often expected by shareholders as their share of the company's profits. Dividend payments reflect positively on a company and help maintain investors’ trust.
A high-value dividend declaration can indicate that a company is doing well and has generated good profits. But some may interpret it as an indication that the company does not have much going in the way of new projects to generate better returns in the future. It's using its cash to pay shareholders instead of reinvesting it into growth.
A company with a long history of dividend payments that declares a reduction or elimination of its dividend signals trouble. AT&T Inc. cut its annual dividend in half to $1.11 on Feb. 1, 2022, and its shares fell 4% that day.
However, a dividend cut does not necessarily translate into bad news. The company's management may have a plan for investing the money in a high-return project that could magnify returns for shareholders in the long run.
Dividends paid by funds are different from dividends paid by companies. Funds employ the principle of net asset value (NAV), which reflects the valuation of their holdings or the price of the assets that a fund has in its portfolio.
Regular dividend payments should not be misread as a stellar performance by the fund. For example, a bond-investing fund may pay monthly dividends because it receives monthly interest on its interest-bearing holdings and merely transfers the income from the interest fully or partially to the fund's investors.
A stock-investing fund pays dividends from the earnings received from the many stocks held in its portfolio or by selling a certain share of stocks and distributing capital gains.
Economists Merton Miller and Franco Modigliani argued that a company's dividend policy is irrelevant and has no effect on its stock price or its cost of capital.
A shareholder may be indifferent to a company’s dividend policy, especially if the dividend is used to buy more shares. If a dividend payout is seen as inadequate, an investor can sell shares to generate cash.
In either case, the combination of the value of an investment in the company and the cash they hold will remain the same. Miller and Modigliani thus conclude that dividends are irrelevant, and investors shouldn’t care about the firm's dividend policy because they can create their own synthetically.
This argument has not persuaded the many investors who consider dividends to be an attractive investment incentive.
Investors seeking dividend investments have several options, including stocks, mutual funds, and exchange-traded funds (ETFs).
The dividend discount model or the Gordon growth model can help investors choose individual stocks. These techniques rely on anticipated future dividend streams to value shares.
To compare multiple stocks based on their dividend payment performance, investors can use the dividend yield factor, which measures the dividend in terms of a percentage of the current market price of the company’s share.
The dividend rate can be quoted in terms of the dollar amount each share receives as dividends per share (DPS).
In addition to dividend yield, another important performance measure to assess the returns generated from a particular investment is the total return factor. This figure accounts for interest, dividends, and increases in share price, among other capital gains.
Tax is another important consideration when investing in dividend gains. Investors in high tax brackets often prefer dividend-paying stocks if their jurisdiction allows zero or comparatively lower tax on dividends. For example, Greece and Slovakia have a lower tax on dividend income for shareholders, while dividend gains are tax exempt in Hong Kong.
Dividends are commonly distributed to shareholders quarterly, though some companies may pay dividends semi-annually. Payments can be received as cash or as reinvestment into shares of company stock.
If a company's board of directors decides to issue an annual 5% dividend per share, and the company’s shares are worth $100, the dividend is $5. If the dividends are issued every quarter, each distribution is $1.25.
Dividends signal that a company has stable cash flow and is generating profits. They also provide investors with recurring income.
Dividend payouts may also help provide insight into a company’s intrinsic value.
Many countries also offer preferential tax treatment to dividends, treating them as tax-free income.
Dividends are seen by many investors as a sign that a company is earning a healthy profit and, more to the point, is willing to share it with its investors.
Not all companies pay dividends, and not all investors care about them. If you do, look for the best dividend-paying stocks for your money.
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Description Part of the Series Guide to Dividend InvestingIntroduction to Dividend Investing
CURRENT ARTICLEHow Dividends Work
Dividend Investing Strategies & Concepts
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Related TermsA dividend aristocrat is a company that not only pays a dividend consistently but continuously increases the size of its payouts to shareholders. Get here the 2024 dividend aristocrats list.
A due bill is a promissory note that states that a stock seller must deliver an upcoming dividend payment to the stock's buyer.
Continuous compounding is the process of calculating interest and reinvesting it into an account's balance over an infinite number of periods.
An exempt-interest dividend is a distribution from a mutual fund that is not subject to federal income tax.
The target payout ratio is a goal companies set for the amount of earnings they intend to pay out as dividends. The ratio is important to the company and shareholders.
When stockholders have the right to vote on matters of corporate policy making, they are said to own voting shares.
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