Dividend

A payment a company or fund makes to its shareholders, usually in cash, out of its profits or income.

What it means

Many established companies share part of their profits with shareholders through dividends, commonly paid quarterly. To receive a dividend, an investor must own the shares before the ex-dividend date. Dividends are not guaranteed; a company can cut or stop them, and the share price typically drops by about the dividend amount when the stock goes ex-dividend. Funds also pass along dividends and interest they collect.

In a taxable account, qualified dividends, generally those from U.S. or qualifying foreign companies held for a minimum period, are taxed at the lower long-term capital gains rates. Other ordinary dividends are taxed as regular income. Dividends are taxable in the year paid even if they are automatically reinvested.

Formula

Dividend yield = Annual dividends per share ÷ Share price

Annual dividends per share = total dividends paid per share over a year
Share price = current market price of one share

Example

Suppose a stock priced at $50 pays $2 per share in dividends a year. Its dividend yield is $2 ÷ $50 = 4%, and someone owning 200 shares receives $400 a year.

How it’s used

Generating income from a portfolio, often in retirement
Reinvesting payouts to buy more shares over time
Comparing income from different stocks or funds

Good to know

A very high dividend yield can signal a falling share price or a payout at risk of being cut.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.