What Is a Dividend and How Do They Work?
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The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
Dividends are regular profit-sharing payments made between a company and its investors.
A company's board of directors determines the price per share, when and how often dividend payments are made.
Dividend stocks can provide a stream of income.
Evaluate dividend stock opportunities by their dividend per share, dividend yield and dividend payout ratio.
Dividend definition
Dividends are payments a company makes to share profits with its stockholders. They’re one of the ways investors can earn a regular return from investing in stocks.
Dividends can be paid out in cash, or they can come in the form of additional shares. This type of dividend is known as a stock dividend.
Dividend yield is the company’s annual dividend divided by the stock price on a certain date. Investors use the dividend yield to be able to accurately compare dividend stocks. Dividend payout ratios are also an important measure that tell you how much of a company’s income is put towards dividends versus reinvesting in the company.
But not all stocks pay dividends. If you are interested in investing for dividends, you will want to specifically choose dividend stocks. Companies that increase their dividend payments year after year are usually less volatile than the broader market. And the steady income from dividends can help smooth out a stock’s total return.
» Need a brokerage account? Check out our picks for the best online brokerages for dividend investing
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- Best hotel for business travel: Hilton Garden Inn
- Paycheck advance app cons
- 6 types of dividends
- How to buy closed-end funds
- Factor in other costs
- More about these investment expenses
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- April
- Types of REITs
- Average down payment by state
- Selling vested shares
- Frugal DIY project tips
- What's next?
- 4. Utilize an eSIM card
- Best car insurance in Massachusetts for having few customer complaints: Mapfre
- 3. Taking the standard deduction vs. itemizing
- What state has the highest gas prices?
- Factors to consider before paying rent with a credit card
- C
- Who might prefer the Capital One Quicksilver Cash Rewards Credit Card
- 3. Apple Pay Later
- What else should I consider?
- Credits
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- How to check your tax withholding
- How to qualify for first-time home buyer benefits
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- You'll likely forgo a welcome bonus
- Prepare your paperwork
- Third-party ratings
- 4. Earn extra bonus points
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- 6. Open a cash management account
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- 3. Open an investment account
- Quarterly category cards
- How to open an ABLE account
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- What if I lose the cashier's check?
- Other tech tools to help you manage your money
- 4. Request your FSA ID now
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- Chase Sapphire Reserve®: Our Pick for Travel Perks
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- Optional coverages
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- The annual fee is worth it if:
- Integrations with accounting software
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- 4. The APR is high, so don't carry a balance
- Tax deductions for self-employment
- More ways to take charge of your budget
- Which card should you choose?
- Where to save
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- Get more help with monthly budget planning
- Keep records from your old account
- Additional functionality
- WooCommerce: Best shopping cart plug-in for WordPress users
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- The bottom line
- 3. Don’t fear stock market exposure
- Step 3: Choose your lender and loan
- 5. You may score a free massage
- The long straddle
- 6. Confirm the check details and complete the deposit
- 5. Online savings accounts
- Elite status
- Is a wealth manager worth it?
- Is there security at train stations?
- Who might prefer the Capital One Venture X Rewards Credit Card
- Visa and passport differences
- What can you invest in with a Roth IRA?
- How to apply
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- 3. EarnIn: Best for large advances
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- Step 4: Evaluate and pivot
- How do balance transfers work?
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- 7. Put your money in a MaxSafe account
- Deposit timing
- Foundation grants for nonprofits
- E
- 4. Consider a co-signer
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- Delta first class
- Which is preferable — an authorized user relationship or a joint account holder?
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- How to save on hotels during baseball season
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- May
- What are IRS Free File Fillable Forms?
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- 7. Keep the check until it's processed
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- Which card should you get?
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- Responding quickly is crucial
- Storing your Bitcoins: Hot wallets vs. cold wallets
- Invoice factoring vs. invoice financing
- 5. Consider early action or regular decision
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- 6. Are you doing a hard credit check on me today?
- How to fit HBO Max into your budget
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- What is California's standard deduction?
- Understanding the American Express card families
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- 5. Pool your points
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- 8. Opt for an account with both FDIC and DIF insurance
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- The pros
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- 5. You can use it instantly after approval
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- Pick a savings goal
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- Finally: Calculate the break-even point
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- 2. Certificates of deposit
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- Loan forgiveness
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- 3. Get disability and life insurance
- What is your modified adjusted gross income (MAGI)?
- Dividend tax rate 2024
- Best Michigan auto insurance for ease of use: State Farm
- Next steps
- How the 9 states with no income tax stack up
- Customer support
- F
- 4. Pick an investment strategy
- 4. Klarna
- Why you’d get both
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- Citi Custom Cash® Card
- Wells Fargo Reflect® Card: Our Pick for 0% Intro APR and Balance Transfer
- What part of my income gets taxed by California?
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- Determine any special circumstances
- OpenCart: Best online shopping cart to add to an existing website
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- Step 4: Gather loan documents
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- Travel cards
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- 6. High-yield checking accounts
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- Ready to get started?
- The importance of tax withholding
- Option 2: Bring a business partner on board.
- 7. Do you charge for an interest rate lock?
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- Credits
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- Should you tip?
- 5. Use collateral to secure the loan
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- 6. Reach out to financial aid offices
- EveryDollar, for simple zero-based budgeting
- 4. Varo: Best for existing bank customers
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- How to report dividend income on your taxes
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- 4. Keep an eye on popular tax deductions and credits
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- 6. Pay with a combination of cash and points
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- 3. Bonds
- 8. Will I have to pay mortgage insurance?
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- G
- Which card should you get?
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- 6. Find the right lender
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- August
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- H
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- 6. Tweak your W-4
- 4. Compare companies
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- J
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- After deciding
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- 12. How — and how often — will I be updated on the loan’s progress?
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- K
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- L
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- N
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- T
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- Methodology
What are dividend stocks and why buy them?
Dividends on common stock — like any investment — are never guaranteed. However, dividends are more likely to be paid by well-established companies that no longer need to reinvest as much money back into their business. As a result, stocks that pay dividends can provide a stable and growing income stream.
Dividends are considered an indication of a company's financial well-being. Once a company establishes or raises a dividend, investors expect it to be maintained, even in tough times. Investors often devalue a stock if they think the dividend will be reduced, which lowers the share price.
According to research from Fidelity, during periods of inflation, “stocks that increased their dividends the most outperformed the broad market, on average."
The most reliable American companies have a record of growing dividends — with no cuts — for decades. Examples of companies that pay dividends include Exxon, Target, IBM, Sherwin-Williams Co., and Johnson & Johnson. An elite list of S&P 500 stock companies called the dividend aristocrats have increased their dividend every year for at least 25 years. By comparison, high-growth companies, such as tech or biotech companies, rarely pay dividends because they need to reinvest profits into expanding that growth.
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Dividend vs. growth stocks
Learn more about the difference between dividend and growth stocks, and what they add to your portfolio.
How are dividends paid out?
Imagine you own 30 shares in a company and that company pays $2 in annual cash dividends. You will receive $60 per year. Here’s how it works.
A company earns profits.
The company’s board of directors approve a plan to share those profits in the form of a dividend. A dividend is paid per share of stock. U.S. companies usually pay dividends quarterly, monthly or semiannually.
The company announces when the dividend will be paid, the amount and the ex-dividend date. Investors must have bought the stock at least two days before the official date of a dividend payment (the "date of record") in order to receive that payment.
The company pays out the dividend to shareholders.
The ex-dividend date is extremely important to investors: Investors must own the stock by that date to receive the dividend. Investors who purchase the stock after the ex-dividend date will not be eligible to receive the dividend. Investors who sell the stock after the ex-dividend date are still entitled to receive the dividend, because they owned the shares as of the ex-dividend date.
6 types of dividends
Usually, dividends are paid out on a company’s common stock. There are several types of dividends a company can choose to pay out to its shareholders.
1. Cash dividends
The most common type of dividend. Companies generally pay these in cash directly into the shareholder's brokerage account.
2. Stock dividends
Instead of paying cash, companies can also pay investors with additional shares of stock.
3. Dividend reinvestment programs (DRIPs)
Investors in DRIPs are able to reinvest any dividends received back into the company's stock, often at a discount. DRIPs typically aren't mandatory; investors can choose to receive the dividend in cash instead.
4. Special dividends
These dividends pay out on all shares of a company’s common stock, but don’t recur like regular dividends. A company often issues a special dividend to distribute profits that have accumulated over several years and for which it has no immediate need.
5. Preferred dividends
Payouts issued to owners of preferred stock. Preferred stock is a type of stock that functions less like a stock and more like a bond. Dividends are usually paid quarterly, but unlike dividends on common stock, dividends on preferred stock are generally fixed.
6. Dividend funds
Investors who don't want to research and pick individual dividend stocks to invest in might be interested in dividend mutual funds and dividend exchange-traded funds (ETFs). These funds are available to a range of budgets, hold many dividend stocks within one investment and distribute dividends to investors from those holdings.
How to evaluate dividends
An investor can use different methods to learn more about a company's dividend and compare it to similar companies.
Dividend per share (DPS)
As mentioned above, companies that can increase dividends year after year are sought after. The dividend per share calculation shows the amount of dividends distributed by the company for each share of stock during a certain time period. Keeping tabs on a company’s DPS allows an investor to see which companies are able to grow their dividends over time.
Dividend yield
Financial websites or online brokers will report a company’s dividend yield, which is a measure of the company’s annual dividend divided by the stock price on a certain date.
The dividend yield evens the playing field and allows for a more accurate comparison of dividend stocks: A $10 stock paying $0.10 quarterly ($0.40 per share annually) has the same yield as a $100 stock paying $1 quarterly ($4 annually). The yield is 4% in both cases.
Yield and stock price are inversely related: When one goes up, the other goes down. So, there are two ways for a stock’s dividend yield to go up:
The company could raise its dividend. A $100 stock with a $4 dividend might see a 10% increase in its dividend, raising the annual payout to $4.40 per share. If the stock price doesn’t change, the yield becomes 4.4%.
The stock price could go down while the dividend remains unchanged. That $100 stock with a $4 dividend might decline to $90 per share. With that same $4 dividend, the yield would become just over 4.4%.
Dividend payout ratio
Advisors say one of the quickest ways to measure a dividend’s safety is to check its payout ratio, or the portion of its net income that goes toward dividend payments. If a company pays out 100% or more of its income, the dividend could be in trouble. During tougher times, earnings might dip too low to cover dividends. Like a stock's dividend yield, the company's payout ratio will be listed on financial or online broker websites.
Be sure to check the stock's dividend payout ratio, or the portion of a company’s net income that goes toward dividend payments. Payout ratios are one measure of dividend health, and they are listed on financial or online broker websites.
Are dividends taxed?
All types of dividends are taxable. Dividends paid by U.S.-based or U.S.-traded companies to shareholders who have owned the stock for at least 60 days are called qualified dividends, and are subject to capital gains tax rates. All other dividends are subject to ordinary income tax rates.
Next steps
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