What Is a Dividend? How Cash Dividends Work and What to Expect.

The end of June will mark the end of the second quarter (April, May, and June) in the financial world. The end of the second quarter means that this quarter’s dividends have started to land in my investment accounts! In honor of this, I thought I’d write a quick post about dividends for anyone who isn’t sure what they are – like me, three years ago.

What is a cash dividend?

Cash dividends are the most common type of dividends; they’re simply cash payments made by a company to their stockholders. They are paid at a specific frequency. Usually they’re paid quarterly, but sometimes they are paid more or less frequently, or after a specific, one-time event. Other types of dividends include stock and property dividends, but in this post, we’re focusing on the cash options.

Dividends are essentially how companies pay money to shareholders who have invested in their company. It’s your return on investment, basically.

Think of it like this – when you buy a share of a company, you’re buying a share of their future earnings. The cash dividend is how you get paid your slice of that profit.

The board of directors at each company will decide if a dividend payment will be made and what amount will be paid. It’s important for companies that pay dividends to maintain (or increase) that payment in order to keep up their reputation and the value of shares.

Companies that have a long history of paying stable or rising dividends are often called Blue Chip stocks. Blue Chip stocks are valuable because they provide fairly dependable earnings – however, they are not a guarantee, and it’s always important to diversify your investments.

Which companies pay dividends?

Not all companies pay dividends to their shareholders. Larger, more established companies usually do — think Johnson & Johnson, Walmart, and Disney. But younger companies, especially those in high or rapid-growth phases, usually don’t pay dividends – think Tesla or Biogen.

Instead of paying dividends, those younger, high-growth companies use their profits to reinvest directly in the company for continued growth. Shareholders of these companies are cool with this, with the assumption that the reinvestment will lead to the price of their shares going up, possibly earning them higher dividends in the future.

Dividends are paid out on a per-share basis. In order to get paid the dividend associated with one of your shares, you must have purchased that share prior to the ex-dividend date for that quarter and own it on the record date – when a company determines its list of shareholders on record eligible to receive the payment. Don’t worry about those details though, that’s more than you need for now.

How much are dividend payouts usually?

The average dividend yield (the amount a dividend pays relative to its stock price) tends to be around 2-5%.

You can usually choose if you want to accept your dividends as cash payments or have them automatically reinvested. It’s usually a good idea to have your dividend payments reinvested so that your investments keep compounding and growing without you having to think much about them. Last year I had a little under $400 worth of dividends reinvested in my accounts without even having to do anything!

Because dividend stocks pay you earnings on a semi-regular basis, they can be a useful part of your investment portfolio that can add some stability and help cushion your overall investment and earnings, even during periods when the market is down.