What is a Dividend?By Tom Reese
A dividend is a payment made by a corporation to its shareholders. Usually these payouts are made in cash (called "cash dividends"), but sometimes companies will also distribute stock dividends, whereby additional stock shares are distributed to shareholders. Stock dividends are also known as stock splits.
Cash dividends are normally paid to shareholders each quarter, or four times per year. However, some companies pay dividends annually (once per year), semi-annually (twice per year), or even monthly (12 times per year). Each company sets its own payout schedule and determines the dividend dates on which the dividends will be made. Some companies will even pay a special (one-time) dividend every so often. These special payouts are separate from the company's regular payout schedule and are not factored into the stock's dividend yield.Not every company pays dividends, and companies can change their dividend policies at any time. As investors become increasingly hungry for yield, however, more and more companies are initiating new dividends and raising their existing dividends.
Some Quick Facts about Dividends
- The term "dividend" derives from the Latin term dividendum, or "thing to be divided." In other words, companies divide their profits up among shareholders.
- Companies have been paying dividends to shareholders for over 400 years. The first company to ever pay a dividend was the Dutch East India Company in the early 1600s.
Dividends alone have accounted for over 40% of the S&P 500's total returns since 1929.
Fig. 1: U.S. Stock Returns by Decade
Fig. 2: U.S. Stock 20-Year Returns
Why do Companies Pay Dividends?
Companies sell stock shares to the public to raise money, which they then use to fund existing operations and expand their businesses. In essence, a dividend is a reward given to shareholders for owning stock in the corporation. So, dividends are a key way for companies to attract investors to buy their stock.
Fig. 3: Comparison of S&P Returns
Now let's take a look at what those various investing returns could buy you, based on historic average annual return.
Fig. 4: Annual Investing Income Examples
From the early days of stock markets through the mid-20th century, dividends were the primary method of returning value to shareholders. Price appreciation was considered more of a bonus, as people bought stocks mainly because of their sizable dividends.
In more recent times, dividends have come back into vogue. For the past five years, dividend stocks have easily outpaced the price performance of non-dividend stocks.
Fig. 5: S&P 500 vs. Dividend Aristocrats
How do I Collect a Dividend?
If you buy a dividend-paying stock and meet the eligibility requirements (determined by its dividend dates), you'll receive dividends. These dividend payouts are issued on a per-share basis. For example, if an investor purchases one share of stock XYZ, which pays 25 cents quarterly, the investor will receive 25 cents for each share he or she owns, four times per year.
Dividends are most commonly deposited into a shareholder's brokerage account. However, if an investor buys shares directly from a company itself (through a direct investment plan like a DRIP, for example), then the dividends can be automatically reinvested to buy more shares. Investors may also choose to have dividend checks mailed to them.
What is Dividend Yield?
A stock's dividend yield refers to the expected return of a stock -- in dividends -- over the course of a calendar year. Yield is presented on a percentage basis of the stock's current price. For example, if stock XYZ is trading at $100 per share, and it pays a total of $5 in dividends this year, then its dividend yield is 5% (since $5 is 5% of $100).
Since a stock's price will change on a daily basis, so will its dividend yield. Dividend yield will move up or down inversely to the share price. So if a stock's price goes up, its yield goes down -- and vice versa.
Video: Everything You Need to Know about Dividend Yield
Further Reading on Dividend.com
Now that you know what dividends are, why not check out some of our other great dividend-related resources?
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