Dividend definition

What is a dividend?

A dividend is the amount of profit that a company returns to its shareholders. It’s expressed as a percentage, and it can change from year to year, depending on how profitable the company has been.

Some companies pay a dividend, others don’t – so it’s important to check whether or not a company pays dividends if that’s something that will affect your decision to invest.

 

Why do companies pay dividends?

Companies can choose to reinvest their profits or to pay out a proportion of it as a dividend. Reinvesting profit will hopefully lead to higher growth. But paying a dividend is a way to reward shareholders for their faith in the company and to attract new investment in the future.

The theory is that attracting new investment will help to boost the company’s market value by increasing demand for their stock. It will also give the company more money because more people will be purchasing that company’s stock.

If a company doesn’t pay a dividend, investors would hope that the profits are reinvested into the company to increase its future profitability. This would hopefully lead to higher share price growth – rewarding shareholders with an increased return on their original investment if they choose to sell their shares in the future.

 

When do companies pay dividends?

Dividends are usually paid at quarterly intervals throughout the year – quarter one (Q1) at the end of March, Q2 at the end of June, Q3 at the end of September and Q4 at the end of December.

There are exceptions, and the ultimate decision for when to pay a dividend and how much the dividend will be is down to each company’s board of directors.