What is a Dividend and Why Should I Care?

A dividend is a sum of money paid out to shareholders by a company typically on a regular basis from corporate profits or reserves.  Dividends are a way of paying investors for providing capital to the company in the form of stock ownership. Companies use proceeds from the sale of stock to fund operations, fuel expansion and more. They’re one of the main benefits of owning stock in a company.

What Types of Companies Typically Pay a Dividend?

Established companies that have been in business for some time often pay dividends.

This may include companies from the following areas:

  • Oil and gas companies
  • Financial companies
  • Pharmaceutical companies
  • Healthcare companies
  • Utility companies
  • Consumer staples

New startups and industries such as biotech or some tech companies may not pay a dividend. Startups may need to reinvest all cash to continue their growth and fund day to day operations while high growth companies may reinvest proceeds to fuel further expansion.

What is a Special Dividend?

A special dividend, otherwise referred to as a one-time dividend, are separate from normal dividends and are not factored into a stock’s dividend yield. Special dividends are typically paid out to shareholders in cases of extremely strong earnings or if a company is undergoing financial restructuring.

What is a Dividend Yield?

A dividend yield is the amount of money a company pays out per year in dividends in relation to its share price. It’s quoted as a percentage and is calculated by dividing the annual dividends per share by the share price.

If you own stocks in your portfolio or wish to begin building a stock portfolio, dividends can play a very important role in your returns. Getting to know the ins and outs of dividends may help you in your stock choices and can potentially have a significant impact on overall portfolio returns.