Investing & Markets

What is Dividend?

A dividend is a payment a company makes to its shareholders from its profits. Dividends are declared by the corporation's board of directors and are typically paid quarterly in cash, though they can also be distributed as additional shares of stock. Dividends are a common source of investment income.

Not all companies pay dividends. Fast-growing companies often reinvest all earnings back into the business, while mature, established companies are more likely to distribute dividends to attract investors. Lenders and analysts track the 'dividend yield' (annual dividend divided by stock price) to evaluate dividend income.

Dividends are subject to taxation. Qualified dividends (which meet specific holding period requirements) are taxed at preferential long-term capital gains rates (0%, 15%, or 20%). Non-qualified dividends (ordinary dividends) are taxed at ordinary income tax rates, up to 37%.

Quick Facts

Distribution TypeCash payments or stock distributions from corporate profit

Deciding AuthorityBoard of Directors of the corporation

Tax ClassesQualified (capital gains rates) and ordinary (income rates)

Income MetricDividend yield (annual dividend per share ÷ stock price)

PRACTICAL EXAMPLE

A company pays a quarterly dividend of $0.50 per share. An investor who owns 500 shares will receive $250 in cash each quarter ($1,000 annually). If the stock price is $100, the stock's dividend yield is 1.0% ($1.00 ÷ $100).

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RELATED TERMS

Learn More Key Concepts

StockA financial security representing a fractional share of ownership in a corporation, conveying voting rights and claims on assets.

Mutual FundA pooled investment vehicle managed by professionals that buys a diversified portfolio of securities, priced once daily.

Capital GainAn increase in the value of a capital asset, such as stock or real estate, realized when the asset is sold for a profit.

P/E RatioA valuation ratio calculated by dividing a company's current share price by its earnings per share.

YieldThe income return on an investment, expressed as an annual percentage based on the asset's cost or market value.

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