Dividends
A dividend is a portion of a company's profit paid directly to shareholders, usually quarterly, simply for owning the stock. Not every company pays one, many growth-focused companies reinvest all profits back into the business instead, but for companies that do pay dividends, it's a way to earn real cash income from a stock you hold, on top of any price appreciation.
A worked example
If a company pays a $1 annual dividend per share and you own 100 shares, you'd receive $100 a year in cash (often split into quarterly payments of $25), regardless of whether the stock price went up or down that year. Many investors choose to automatically reinvest dividends back into buying more shares, which adds an extra layer to compound growth.
Key takeaways
- Dividends are real cash paid to you just for holding the stock, separate from price changes.
- Not all companies pay dividends, many reinvest profits into growth instead.
- Reinvesting dividends automatically buys more shares, compounding your position over time.
Common mistakes
- Chasing unusually high dividend yields without checking whether the company can actually sustain paying them.
- Assuming a company not paying dividends is a bad investment, many strong growth companies simply reinvest instead.
- Forgetting that a dividend payment reduces the company's cash, which can affect the stock price slightly on the payment date.
Test yourself
1. What is a dividend?
- A fee you pay to own a stock
- A portion of company profit paid directly to shareholders
- A type of stock split
- A government bond payment
Answer: A portion of company profit paid directly to shareholders. Dividends are cash payments companies make to shareholders from their profits.
2. Do all companies pay dividends?
- Yes, it's required by law
- No, many reinvest profits into growth instead of paying dividends
- Only ETFs pay dividends
- Only companies with red logos
Answer: No, many reinvest profits into growth instead of paying dividends. Dividend payments are optional, growth-focused companies often reinvest all profit instead.
3. What does reinvesting dividends do?
- Cancels the dividend
- Uses the cash to automatically buy more shares, adding to compounding
- Converts shares into bonds
- Nothing happens automatically
Answer: Uses the cash to automatically buy more shares, adding to compounding. Reinvested dividends buy additional shares, which can meaningfully add to long-term compound growth.
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Sources and further reading
- Investor.gov (U.S. SEC): Introduction to Investing
- Investor.gov: Glossary of investing terms
- FINRA: Investing basics for individuals