Dividend.
In plain English
Some companies share part of their profits with shareholders by sending out dividends, usually four times a year. The amount per share is announced in advance, so you know what to expect. Many large, mature companies pay dividends; many growing companies don't (they reinvest the money instead). When you own a fund or ETF that holds dividend-paying stocks, the fund collects the dividends and distributes them to you.
01Why it matters
Dividends are part of a stock's total return. Historically, dividends have made up roughly 30% of the long-run total return of the U.S. stock market. They're also taxed at favorable rates (often 0%, 15%, or 20% for 'qualified' dividends, depending on your tax bracket), lower than ordinary income. In retirement accounts, dividends compound tax-deferred (Traditional) or completely tax-free (Roth).
02The math, step by step
If you own 100 shares of a stock that pays a $1.20 annual dividend, you receive $120 per year in cash, paid out as roughly $30 per quarter. You can take the cash or have it automatically reinvested to buy more shares (called a DRIP. Dividend Reinvestment Plan), which compounds nicely over time.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Dividends are not guaranteed. Companies can cut, suspend, or eliminate them at any time, and many do during recessions. A high dividend yield can sometimes signal a company in trouble, the price has fallen, which mathematically raises the yield, but the dividend may not last.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice