What is a Dividend?

A dividend is a payment that a company makes to its shareholders, where the amount is determined by the board of directors.

When a company pays out its dividends, it can do so as cash payments or shares of stock.

Dividends come from the company's net profits for a certain time period, usually quarterly. However, companies may decide to keep its profits inside the company as retained earnings. It may also decide to buy back its own shares.

Shareholders must first of all approve dividend payments. These payments can be set as a single, one-time special dividend, or it can be as continuous payments to the owners and investors.

A Dividend Example

For example, let's say you own 10,000 shares in Company Z. Let's imagine that Company Z pays out annualized dividends in the amount of 40 cents per share.

Since most companies pay dividends on a quarterly basis, you would get 10 cents per share per quarter. With 10,000 shares, you will be getting $1,000 per quarter. If you owned hundreds of shares, the payments are naturally much larger.

Most shareholders choose to invest their dividends into buying more shares.