In plain English
When a company earns a profit, it can keep the money to grow the business or pay part of it to its owners. The part it pays out is a dividend. If you own shares, you are an owner, so you receive a payment for each share you hold.
Example
A company pays $0.50 per share every quarter and you own 100 shares. You receive $50 each quarter, or $200 a year.
Why it matters
Dividends turn a share into a source of cash income while you still own the shares. They also make up a large part of the long-term return of many stocks, especially when they are reinvested.
Common mistakes
- Assuming dividends are guaranteed. The board can reduce or cancel them at any time.
- Judging a stock only by its dividend. A falling share price can wipe out the income.