What Is a Dividend? How Companies Pay You to Hold Their Stock

A dividend is a cash payment a company makes to its shareholders out of its profits, usually every three months, as a way of handing some of the money it earns back to the people who own it. If you hold the stock on the right date, the company pays you a set amount for each share you own.

Not every company pays a dividend, and a dividend is not free money, two points that trip up new investors. This page explains what a dividend is, the dates that decide who gets paid, what dividend yield means, and why the share price adjusts when a dividend is paid. It is descriptive throughout.

What a dividend is

When a company earns a profit, it can do two things with the cash: reinvest it back into the business, or pay some of it out to shareholders. A dividend is that payout. It is quoted as an amount per share, for example 50 cents per share per quarter, so a holder of 100 shares receives 50 dollars for that quarter. The company's board decides the amount and can raise it, cut it, or stop it.

The dates that decide who gets paid

Four dates govern a dividend, and one of them is the one to know:

• Declaration date: the day the board announces the dividend and its amount.
• Ex-dividend date: the cutoff. You must own the stock before this date to receive the dividend. Buy it on or after the ex-date and the seller keeps the payment.
• Record date: the day the company checks its books for who the shareholders are.
• Payment date: the day the cash actually arrives.

The ex-dividend date is the one that matters in practice, because it decides whether a given purchase entitles you to the next payment.

Dividend yield

To compare dividends across companies of different sizes, investors use the dividend yield, which is the annual dividend divided by the share price, shown as a percent. A stock at 100 dollars paying 4 dollars a year in dividends has a 4 percent yield. Yield lets you see the income relative to the price, but a very high yield can also be a sign the share price has fallen sharply, so it is read with context, not on its own.

Why the price drops on the ex-date, and why some companies pay nothing

A dividend is not something for nothing. On the ex-dividend date, a stock's price typically falls by about the amount of the dividend, because the company has committed to paying out that cash and is worth that much less per share until it earns more. The dividend moves value from the share price into your pocket rather than adding to it.

This is also why many growth companies pay no dividend at all. A younger company often believes it can earn a better return by reinvesting its profit into growth than by handing it to shareholders, so it keeps the cash. Dividends are more common at mature, steadily profitable companies. A company announces and changes its dividend through its filings, which Kresmion lists on each research page.

Key takeaways

Frequently asked questions

How do dividends work?

A company's board declares a payment per share, and every shareholder who owns the stock before the ex-dividend date receives it on the payment date. You do not have to do anything; if you hold the shares in time, the cash arrives in your account.

What is the ex-dividend date?

It is the cutoff date for a dividend. To receive the upcoming payment you must own the stock before the ex-dividend date. If you buy on or after it, the person who sold you the shares keeps that dividend instead.

What is dividend yield?

It is the annual dividend divided by the share price, expressed as a percent, so it shows the income a dividend provides relative to what the stock costs. A high yield can reflect a generous payout or a fallen share price, so it is read alongside the rest of the picture.

Do all stocks pay dividends?

No. Many companies, especially younger growth companies, pay nothing and reinvest their profit into the business instead. Dividends are more typical of mature, steadily profitable companies that have cash to return.

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Source: dividends are a standard cash distribution of company profit to shareholders. Dividend declarations appear in a company's filings, which Kresmion lists on each research page. This page is information, not investment advice. Kresmion Research.