Investor Facts: What Is A Dividend?

A dividend is a periodic cash payment to shareholders of a company.

Usually made quarterly, a dividend payment is a distribution of corporate profits. The number of shares an investor owns determines the payout.

Dividend payments can be taken as cash income, as additional shares or reinvested automatically into more shares.

Dividends are common but not required. Many high-growth companies instead reinvest in their own operations.

Slower-growing companies, meanwhile, typically try to issue a steady dividend payment to investors.

Think of a dividend as a reward for your trust and confidence in a company. Dividends are your share in the company’s profits and, like profits, are not guaranteed. They can be lowered or eliminated.

A company has the choice to issue dividends or not. The board of directors may decide to instead reinvest profits.

This may continue for a period of time, then the board may decide to resume paying a dividend.

A company facing difficulties may choose to reduce or suspend dividends.

This can have a negative effect investor confidence and may cause shareholders to reduce their holdings in that company’s stock.

Calculating yield

Companies also can increase dividends and sometimes issue special, one-time dividends. This tends to project a positive feeling of stability among investors.

While dividends are generally issued in cash, they may be issued in shares. This would be a direct addition of shares to an investor’s holdings and should not be confused with dividends that are reinvested into shares of the same company.

The payments are made quarterly.

However, to calculate yield you must add up the dividend amounts and use the yearly total instead.

Dividends generally are given preferential tax treatment and may be received by some investors free of tax or at a much lower tax rate than ordinary income.

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