A dividend is a payment a company makes to its shareholders, usually from profits. In the US, many companies pay quarterly, in cash per share. If a company pays $0.50 per quarter and you own 100 shares, you receive $50 four times a year. Funds that hold dividend-paying stocks pass the dividends on to you.
Key dates
- Declaration date: the board announces the amount and dates.
- Ex-dividend date: you must own the shares before this date to receive the dividend. On the ex-date, the share price usually drops by roughly the dividend amount.
- Record date: the company checks its shareholder list.
- Payment date: the cash arrives in your account.
Because the price falls on the ex-date, buying just before it to “capture” the dividend does not create free money, and it can create a tax bill.
Numbers to understand
- Dividend yield = annual dividends per share ÷ share price. A $2 annual dividend on a $50 stock is a 4% yield.
- Payout ratio = dividends ÷ earnings. A company paying out more than it earns cannot keep it up for long.
- Dividend growth: some companies have raised dividends every year for decades; the S&P 500 “Dividend Aristocrats” have done so for at least 25 years.
The yield trap
An unusually high yield often means the share price has fallen because investors expect trouble, and the dividend may be cut. Companies cut or suspended dividends widely in 2008-2009 and 2020. Look at payout ratio, debt and earnings trends, not only the yield (researching a company).
Reinvesting dividends
Most brokers let you reinvest dividends automatically (a DRIP), buying more shares, including fractions. Over decades, reinvested dividends have made up a large share of total stock market returns. That is compound interest at work.
Taxes
- Qualified dividends (from most US companies and many foreign ones, held long enough) are taxed at long-term capital gains rates: 0%, 15% or 20%.
- Ordinary (non-qualified) dividends, including most REIT distributions, are taxed as regular income.
- Inside an IRA or 401(k), no tax is due each year.
See how investment income is taxed for the brackets.
Dividends vs growth
A dividend is not extra return on top of the share price; it is part of the total return. A company that keeps profits to grow can reward shareholders just as well. Many investors simply hold a broad index fund and receive whatever dividends the market pays. Compare styles in growth vs value investing. Share counts change in a stock split, and the dividend per share is adjusted to match. The SEC explains the terms in its ex-dividend dates bulletin.
