Stocks & Equities · definition
Dividend
A dividend is a payment a company makes to its shareholders, usually in cash and usually from profits. Not every company pays one, and no company is obliged to.
A dividend is a distribution of a company's earnings to its shareholders, decided by the board of directors. Most dividends are cash (a fixed amount per share, typically paid quarterly in the US and annually or semi-annually in Europe), but they can also take the form of extra shares (stock dividends).
A company that pays $0.50 per share per quarter pays $2.00 a year; at a $50 share price that is a 4% dividend yield.
Key takeaways
- Dividends are paid per share, at the board's discretion. They can be raised, cut or scrapped.
- Four dates govern who gets paid: declaration, ex-dividend, record and payment date.
- On the ex-dividend date the share price typically drops by roughly the dividend amount.
- Total return = price change + dividends. Ignoring dividends understates long-run stock returns substantially.
The four dates
| Date | What happens |
|---|---|
| Declaration date | The board announces the dividend amount and schedule |
| Ex-dividend date | First day the share trades without the right to the dividend; buy on or after this date and you do not receive it |
| Record date | The company checks its shareholder register (usually one business day after ex-date) |
| Payment date | Cash lands in shareholder accounts |
The ex-dividend mechanics explain a price pattern that confuses newcomers: a share does not become "cheaper" on the ex-date in any meaningful sense. The price drops by about the dividend because the buyer no longer receives that cash.
Where dividends come from, and when they stop
Dividends are paid from a company's earnings and cash reserves. The payout ratio (dividends divided by earnings) describes how much of profit is returned: a ratio near or above 100% is hard to sustain. Boards treat the dividend as a signal, which is why cuts are rare, loudly punished by markets, and usually a sign of genuine distress: in 2020, well-known firms including Royal Dutch Shell cut for the first time since the Second World War.
Some of the largest companies pay nothing at all. Berkshire Hathaway has paid exactly one dividend since 1965 (ten cents in 1967, which Warren Buffett later joked must have been declared while he was in the bathroom). Fast growers typically reinvest everything; see what is a stock for the shareholder mechanics.
Dividends and total return
Long-run equity return figures usually assume dividends are reinvested. The difference compounds: over decades, reinvested dividends have accounted for a large share of the total return of broad indexes such as the S&P 500. This is arithmetic, not a recommendation of dividend stocks; high-dividend shares are not automatically better or safer, and a very high yield often signals a price that has fallen for a reason.
Tax, briefly
Most countries tax dividends, often with withholding at the source for foreign holders (the US standard rate is 30%, reduced by tax treaties, for example to 15% for Dutch residents). Rules differ per country and account type; specifics belong with a tax adviser.
Frequently asked questions
Can I buy a share just before the ex-date, collect the dividend and sell?
You receive the dividend, but the price drops by roughly the same amount on the ex-date, and you owe tax on the dividend. "Dividend capture" strategies exist but the free lunch does not.
What is a special dividend?
A one-off distribution outside the regular schedule, often after an asset sale or an unusually profitable period.
What is a DRIP?
A dividend reinvestment plan: dividends automatically buy more shares, sometimes commission-free, which puts compound interest to work on the payout.
Sources
This entry is for education only. Investing Value describes how financial concepts work; it does not provide investment, tax or legal advice, and nothing here is a recommendation to buy or sell any asset.