Dividend
A dividend is a cash payment made by a company to its shareholders, typically quarterly, as a distribution of profits. Dividends provide income without selling shares and are common among mature, profitable companies.
Dividend yield = annual dividend per share ÷ stock price × 100. A stock paying $2/year trading at $50 has a 4% yield. Utilities, consumer staples, and REITs tend to have higher dividend yields than growth tech companies.
Dividends can be taken as cash or reinvested automatically through a DRIP (Dividend Reinvestment Plan). Reinvesting creates compounding: dividends buy more shares, which produce more dividends.
In the US, qualified dividends are taxed at the lower long-term capital gains rate (0%, 15%, or 20%). Ordinary dividends are taxed as income.
Related terms
- Compound Interest
- Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It causes savings and investments to grow exponentially over time.
- Rate of Return
- A rate of return (RoR) is the net gain or loss of an investment over a specified period, expressed as a percentage of the initial investment.
- Index Fund
- An index fund is a portfolio of stocks or bonds designed to replicate the performance of a market index, such as the S&P 500. Index funds have lower fees than actively managed funds because no stock-picking is required.