What Is a Dividend? How Companies Share Profits With Investors

A dividend is a portion of a company's profit paid to shareholders, as Investor.gov defines it. Public companies that pay dividends usually do so on a fixed schedule, though they can issue them at any time; unscheduled payments are called special dividends.

How do dividends work?

If you own shares of a company or a fund that holds dividend-paying companies, the dividend shows up as cash in your account, typically every quarter. You can take the cash or reinvest it to buy more shares. Reinvesting dividends is one of the simplest ways to put compounding to work, because each payment buys more shares that can generate their own dividends. Many brokerages offer automatic dividend reinvestment, often called a DRIP, at no extra cost.

Do all companies pay dividends?

No. Many companies, especially younger growth companies, pay no dividend and instead reinvest profits back into the business. Dividends are more common among large, established companies. Funds that hold many stocks collect the dividends of the underlying companies and pass them through to fund shareholders.

Are dividends guaranteed?

No. A company's board decides each dividend, and companies can reduce or stop dividends when business weakens. Stock prices also move up and down regardless of the dividend, so a dividend-paying stock can still lose value.

Frequently asked questions

How are dividends taxed? In a regular brokerage account, dividends are generally taxable in the year you receive them, even if reinvested. Inside retirement accounts like IRAs and 401(k)s, that tax is deferred or, in a Roth, potentially avoided.

What is a dividend yield? The annual dividend divided by the share price, expressed as a percentage. It moves whenever the price or the dividend changes.

Sources and further reading: Investor.gov, "Dividend" (https://www.investor.gov/introduction-investing/investing-basics/glossary/dividend); Investor.gov, "Stocks" (https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks).