What Are Dividends?

A dividend is a direct payment from a company to its shareholders. It usually comes from profits. This is a way to share success directly, not just through a rising stock price. Companies typically pay dividends quarterly. They express it as a dollar amount per share (for example, $0.50 per share) or as a "dividend yield." This yield is the annual dividend divided by the current share price, shown as a percentage.

Not every company pays dividends. Younger, fast-growing firms often reinvest every dollar of profit back into the business. They believe this will create more shareholder value than a cash payout. On the other hand, older, established companies often return more cash through dividends since they have fewer high-return growth opportunities left.

Here's an important detail. A dividend isn't "free money." On the "ex-dividend date," a stock's price usually drops by about the dividend amount. That’s because the cash goes to shareholders instead. Many long-term investors prefer to reinvest dividends back into more shares. They do this through a DRIP, or dividend reinvestment plan, to compound their position over time.