What are dividends and how do they work? (2024)

Even if you're new to investing you've probably heard about dividends. These are payments publicly traded companies may make to shareholders and can take the form of cash or additional shares, known as stock dividends.

There are several reasons investors look to dividend stocks: Most pay out quarterly, which can provide relatively reliable income. Companies that pay dividends are typically seen as more stable and financially sound and, historically, dividend stocks have provided a buffer during market downturns.

Below, CNBC Select explains how dividends are paid out, how to judge their value and more.

What we'll cover

  • What is a dividend?
  • How are dividends paid?
  • How to invest in dividend stocks
  • Are dividends taxed?
  • Bottom line

What is a dividend?

A dividend is a portion of a company's earnings that is paid to a shareholder. The most common type of dividend is a cash payout, but some companies will issue stock dividends.

Dividends are typically issued quarterly but can also be disbursed monthly or annually. Distributions are announced in advance and determined by the company's board of directors.

Companies pay dividends for a variety of reasons, most often to show their financial stability and to keep or attract investors.

Not all stocks pay dividends — in fact, most do not.Some major companies, including Amazon and Alphabet, have never issued dividends.

Companies that do pay dividends tend to be larger and more established, with steady growth rather than sudden spikes. S&P 500 companies that have a long history of paying increased dividends are called Dividend Aristocrats.

How dividends are paid

Dividends are typically paid according to how many shares you have. If you own 100 shares of a company that is trading at $1 a share and paying a dividend of 25%, you would be paid $25.

Cash dividends are paid out either as a check sent to the investor or as a credit to a brokerage account, which can then be reinvested.

Stock dividends are paid in fractional shares. If a company issues a stock dividend of 5%, shareholders will receive 0.05 shares in dividends for every share they already own.

There are several important days to keep in mind when it comes to dividends.

  • The declaration date is when a company announces that a dividend will be paid.
  • The ex-dividend date (or "ex-date") is the deadline to purchase a stock and still be eligible to receive the dividend. It is set according to stock exchange regulations.
  • The record date is the date by which investors must be on the company's books in order to receive a dividend. Officially set by the board of directors, it's usually one day after the ex-dividend date. Any trades made on this date are not eligible for dividends until the next distribution.
  • The payment date is when dividends are paid to shareholders.
  • The settlement date is the day a trade is finalized and a shareholder officially owns the stock if they purchased shares or they receive payment if they sold shares. It's typically two days after a buy order is made.

There are different ways to measure dividends and their value to investors.

  • The dividend rate represents how much of a stock's share price shareholders receive in dividends. If a stock is trading at $100 a share and pays a dividend of $5 each quarter (or $20 a year), the dividend rate is 20%.
  • A dividend payout ratio, meanwhile, indicates what percentage of a company's earnings is being paid out in dividends. If a company has earnings of $100,000 and pays total dividends of $20,000, it would have a dividend payout rate of 20%.
  • A dividend yield is one of the ways investors determine if a stock is profitable. To find it, divide the stock's annual dividend by its current share price.So, if a stock is trading at $100 and its annual dividend per share is $5, the dividend yield is 5%.

How to invest in dividend stocks

Investment options for dividend stocks are as varied as they are for any other stock — you can choose shares of an individual company, mutual funds or ETFs.

The easiest way to buy dividend stocks is by opening a brokerage account. Ally Invest®'s self-directed cash account has no minimum balance requirement, making it an attractive option for those dipping their toes into the market for the first time.

Ally Invest®

On Ally's secure site

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for Self-Directed Trading. $100 minimum for Robo Portfolios

  • Fees

    Fees may vary depending on the investment vehicle selected. Self-Directed Trading has zero commission fees for stock, ETF, options trades; $0.50 per options contract. Robo Portfolios have zero management fees

  • Bonus

    You may be eligible for up to $3,000 bonus cash when you open an Ally Invest Self-Directed account

  • Investment vehicles

    Robo-advisor: Ally Invest Robo Portfolios IRA: Ally Invest Traditional, Roth and Rollover IRAs Brokerage and trading: Ally Invest Self-Directed Trading

  • Investment options

    Stocks, bonds, ETFs, options, mutual funds, margin account and forex trading

  • Educational resources

    Offers informational articles to help users improve their understanding of investment strategies and market trends

Terms apply.

Charles Schwab allows investors to buy fractional shares so you can access big-name stocks without breaking the bank.

Charles Schwab

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One®Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit

  • Fees

    Fees may vary depending on the investment vehicle selected. Schwab One®Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract

  • Bonus

    None

  • Investment vehicles

    Robo-advisor: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One®Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™ and Schwab Organization Account

  • Investment options

    Stocks, bonds, mutual funds, CDs and ETFs

  • Educational resources

    Extensive retirement planning tools

Terms apply.

Are dividends taxed?

While stock dividends are typically not taxed until the shares are sold, cash dividends are considered taxable income by the IRS. How they're taxed, however, depends on whether they're qualified or nonqualified: Qualified dividends, which have been issued by a U.S.-traded company to shareholders who have owned the stock for more than 60 days, are subject to capital gains tax rate.

All other dividends are considered nonqualified and are subject to standard income tax rates.

If you receive more than $10 in dividends, your brokerage will send you a 1099-DIV form with relevant information for completing your tax returns.

Subscribe to the CNBC Select Newsletter!

Money matters —so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox.Sign up here.

FAQs

A dividend is a portion of a company's profits that is paid to its shareholders, usually quarterly.

Dividends are more commonly offered by well-established companies that exhibit consistent but tempered growth over time.

Ordinary dividends are taxed at the standard income tax rate while qualified dividends are taxed at the capital gains rate.

Dividends are typically paid out by the share. If you own 100 shares of a company that is paying a dividend of $.25 per share, you will earn $25.

A dividend yield is a percentage that compares a company's stock price to the dividend it pays. It is one of several metrics investors will use to determine if a stock is profitable.

Bottom line

Stock dividends allow companies to share a portion of their profits with its investors. Dividends from stocks can be an additional source of passive income allowing individuals to further grow their finances.

Why trust CNBC Select?

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

Catch up on CNBC Select's in-depth coverage ofcredit cards,bankingandmoney, and follow us onTikTok,Facebook,InstagramandTwitterto stay up to date.

Read more

How to set up your first brokerage account

Getting your money right: How to invest in a volatile market

How to invest $1,000 — wherever you are on your financial journey

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

What are dividends and how do they work? (2024)

FAQs

How does a dividend work? ›

Cash dividends are paid out either as a check sent to the investor or as a credit to a brokerage account, which can then be reinvested. Stock dividends are paid in fractional shares. If a company issues a stock dividend of 5%, shareholders will receive 0.05 shares in dividends for every share they already own.

What is a dividend quizlet? ›

What is a dividend? Payment made out of a firm's earnings to its owners, in the form of either cash or stock.

What are dividends and how do you invest? ›

Dividends are payments a company makes to share profits with its stockholders. They're one of the ways investors can earn a regular return from investing in stocks. Dividends can be paid out in cash, or they can come in the form of additional shares. This type of dividend is known as a stock dividend.

What is a dividend example? ›

Dividend: The number or value or amount that we divide is known as a dividend. For example, if we have to distribute 10 toffies among 5 children, then we need to divide the 10 toffies by 5, which will result in 2 toffies for each child. Hence, the value 10 is the dividend here.

What is the dividend answer in one sentence? ›

A dividend is a share of profits and retained earnings that a company pays out to its shareholders and owners.

What is dividend and how is it calculated? ›

Dividend per share (DPS) refers to the portion of earnings allocated to shareholders. The board makes the decision based on the EPS. It is computed by dividing the total dividend by the number of outstanding shares.

What is dividend in own words? ›

A dividend is a reward paid to the shareholders for their investment in a company's equity, and it usually originates from the company's net profits.

What do dividends represent _____? ›

Dividends, whether cash or stock, represent a reward to investors for their investment in the company. While cash dividends reduce the overall shareholders' equity balance, stock dividends represent a reallocation of part of a company's retained earnings to the common stock and additional paid-in capital accounts.

What do dividends tell us? ›

A steady or growing dividend payment by a company can be a signal of stability and growth. A declining DPS may be due to reinvestment in a firm's operations or debt reduction, but may also indicate poor earnings and be a red flag for financial hardship.

Can you live off dividends? ›

Depending on how much money you have in those stocks or funds, their growth over time, and how much you reinvest your dividends, you could be generating enough money to live off of each year, without having any other retirement plan.

Which company pays the highest dividend? ›

Overview of the Top Dividend Paying Stocks in India
  • Tata Consultancy Services Ltd. ...
  • HDFC Bank Ltd. ...
  • ICICI Bank Ltd. ...
  • Hindustan Unilever Ltd. ...
  • ITC Ltd. ...
  • State Bank of India. ...
  • Infosys Ltd. ...
  • Housing Development Finance Corporation Ltd.
Feb 22, 2024

How do dividends work in funds? ›

Dividends are payments of income from companies in which you own stock. If you own stocks through mutual funds or ETFs (exchange-traded funds), the company will pay the dividend to the fund, and it will then be passed on to you through a fund dividend.

What is a dividend for kids? ›

In a division problem, the number that is to be divided or distributed into a certain number of equal parts is called the dividend. As in the example above, when we are dividing 20 apples into 5 people, the dividend is the number 20; and the number 5 is called the divisor.

What is difference between dividend and dividend? ›

While dividend yield refers to the percentage of the current stock price of a company paid out as dividend over a year, dividend rate is the amount of money that company pays to its shareholders as dividends on per-share basis.

How much does it take to make $1000 a month in dividends? ›

How can I build a portfolio for $1,000 per month in dividends? To achieve $1,000/month in dividends, you'll need a portfolio generating about $12,000 annually with a 3% average yield.

How is dividend income paid? ›

Dividends are distributions of property a corporation may pay you if you own stock in that corporation. Corporations pay most dividends in cash. However, they may also pay them as stock of another corporation or as any other property.

How do you get dividends paid to you? ›

Investors must be listed as owning the shares on this date to be eligible to receive the dividend. It is important to buy the shares before the record date in order to receive the dividend payment. It's typically the business day after the ex-dividend date.

How long do you have to hold a stock to get the dividend? ›

Briefly, in order to be eligible for payment of stock dividends, you must buy the stock (or already own it) at least two days before the date of record and still own the shares at the close of trading one business day before the ex-date.

References

Top Articles
Latest Posts
Article information

Author: Msgr. Refugio Daniel

Last Updated:

Views: 5493

Rating: 4.3 / 5 (54 voted)

Reviews: 85% of readers found this page helpful

Author information

Name: Msgr. Refugio Daniel

Birthday: 1999-09-15

Address: 8416 Beatty Center, Derekfort, VA 72092-0500

Phone: +6838967160603

Job: Mining Executive

Hobby: Woodworking, Knitting, Fishing, Coffee roasting, Kayaking, Horseback riding, Kite flying

Introduction: My name is Msgr. Refugio Daniel, I am a fine, precious, encouraging, calm, glamorous, vivacious, friendly person who loves writing and wants to share my knowledge and understanding with you.