· Listen
A dividend is a small cash payment a company sends to its shareholders, usually every three months, out of its profits. If you own 100 shares of a company that pays a $0.50 quarterly dividend, you get $50 per quarter, or $200 per year.
Not all companies pay them
Mature, profitable companies (utilities, banks, consumer giants like Procter & Gamble) typically pay dividends because they generate more cash than they need. Younger growth companies (Amazon for most of its history, most tech startups) reinvest every dollar back into the business and pay nothing.
Dividend yield
The dividend yield is the annual dividend divided by the share price. A $100 stock paying $3/year in dividends has a 3% yield. The S&P 500 typically yields around 1-2%. REITs and utilities often yield 4-6%.
The myth of 'free money'
Dividends aren't bonus money. When a company pays a dividend, the share price drops by roughly that amount on the ex-dividend date. The total value to you is the same. You just got some of it as cash. Whether you prefer the cash or the higher share price is a tax and personal-preference question, not a free-money question.
Qualified dividends (most common type from US companies) get the lower long-term capital gains rate. Non-qualified dividends are taxed as ordinary income. Inside an IRA or 401(k), the distinction doesn't matter, since there is no tax either way.
What this lesson is NOT
A dividend is not free money: when a company pays one, its share price drops by roughly the same amount, so value moves from one pocket to another. This lesson explains how dividends actually work; it does not claim a dividend stock is better than one that reinvests.
Quick check on this lesson
Answer each question and we’ll show you why the right answer is right, and why the others aren’t.
- 1.
According to the lesson, what is a dividend?
- 2.
Which type of company does the lesson identify as one that typically pays dividends?
- 3.
Per the lesson, what is dividend yield?
- 4.
Why does the lesson say dividends aren't really 'free money'?
- 5.
Per the tax callout, how are 'qualified' dividends from US companies typically taxed in a regular brokerage account?
0 of 5 answered