What are dividends, actually?
Estimated reading time: 2 minutes.
We hear this word thrown around all the time, dividend this, dividend that. This company pays dividends, this one doesn’t!
But what are dividends, actually? Let’s break it down in simple terms.
What are dividends?
Dividends are shareholder rewards in the form of cash or stock simply for being an investor and putting your trust in the company.
The payment often, but not always, comes from the company's profits, so not all companies choose to pay dividends. Instead, they sometimes reinvest the money back into the company. However, companies with a good track record of profitability often do pay dividends.
A dividend policy is a set of guidelines that the company uses to determine whether or not it will pay dividends and on what terms. These policies are usually set by the board of directors.
The policy may have a guideline for an appropriate split of the company's income with regards to dividends for shareholders and the company's overall profitability, among other guidelines. It also may require an annual report and/or oversight of the company's activities, including how well the company adheres to its goals.
How often are they paid?
The rate at which dividends are paid out will be set in the company’s dividend policy and will be different for different companies. Typically, they are paid on a monthly, quarterly, or annual frequency schedule.
These payout dates will fall on different days for different companies, so if you plan and pick the right ones, you could be getting a dividend paycheck every single week!
So... how much do they pay?
Dividend payments are based on the number of shares that you own. They will vary by company, and the payment amount is determined by the board of directors for the particular company.
For example, if the board decides to pay an annual 5% dividend per share, and the company’s share price is $100, the dividend would be worth $5. If the company pays the dividend quarterly, each payment would be $1.25 ($1.25 × 4 = $5).
As another example, as of this writing, Apple has a 0.55% dividend yield, which equates to $0.22 per share. If you have 100 shares of Apple, you would be getting paid $22 ($0.22 × 100) every quarter.
Regardless of which stage you are in your investing journey, it’s important to understand what dividends are and how they can help you in your financial journey. For some, dividends can become a true source of passive income that generates enough wealth for financial independence. I hope this post has been helpful. Let me know what your favorite dividend stocks are in the comments below!