A dividend is a payment a company makes to its shareholders from its profits

When you own stock in a company, you own a small piece of that business. If the company makes money and decides to share some of it with owners instead of reinvesting everything back into the business, that payment is a dividend. The company sends you cash, additional shares of stock, or other property based on how many shares you hold.

Not every company pays dividends. Some businesses — especially younger or faster-growing ones — keep all their profits to expand, hire, or develop new products. Established companies with steady earnings are more likely to pay dividends because they have extra cash and fewer places to spend it for growth.

Dividends are one of two main ways you can make money from owning stock. The other is selling your shares for more than you paid for them, which is called a capital gain. Some investors focus on dividend-paying stocks because they want regular income. Others prefer growth stocks that don't pay dividends but may increase in value faster.

Key Takeaways

  • A dividend is cash or stock that a company distributes to shareholders from its profits, usually paid quarterly or annually.
  • You must own shares before the ex-dividend date to receive the next payment, and that date is set by the company's board.
  • Dividend income is taxable in the year you receive it, and the tax rate depends on whether the dividend is may have access to or non-may have access to.
  • Dividend yield — the annual dividend per share divided by the stock price — helps you compare how much income different stocks generate.
  • A company can cut or eliminate its dividend at any time, so dividend payments are not may provide income.

How companies decide to pay dividends

A company's board of directors votes on whether to pay a dividend, how much to pay, and when to pay it. The board looks at how much profit the company made, how much cash it has on hand, and what it needs for operations and future projects. If the board votes yes, they announce the dividend and set four key dates.

The declaration date is when the board announces the dividend. The ex-dividend date is the cutoff — if you buy the stock on or after this date, you will not receive the upcoming dividend. The record date is when the company checks its records to see who owns shares and is may have access to to payment. The payment date is when the money actually hits your account. These dates are usually a few weeks apart.

Understanding the ex-dividend date matters if you are thinking about buying a stock right before it pays. If you miss the ex-dividend date, you own the stock but not the upcoming payment. The stock price typically drops by roughly the dividend amount on the ex-dividend date because the payment is no longer attached to it.

Types of dividends

Cash dividends are the most common. The company sends you money, usually per share you own. If you own 100 shares and the dividend is $0.50 per share, you receive $50. Cash dividends are paid quarterly, annually, or sometimes monthly, depending on the company.

Stock dividends are additional shares instead of cash. A company might issue a 5% stock dividend, meaning you receive one new share for every 20 you own. This does not give you cash, but it increases the number of shares you hold. Stock dividends are less common than cash dividends.

Special dividends are one-time payments when a company has extra cash from selling a division, a large insurance settlement, or an unusually profitable year. These are not regular and should not be counted on as ongoing income.

Dividend yield and how to compare stocks

Dividend yield is a percentage that shows how much income a stock generates relative to its price. You calculate it by dividing the annual dividend per share by the current stock price. If a stock costs $100 and pays $4 per share annually, the yield is 4%.

Yield helps you compare how much income different stocks produce. A stock yielding 5% generates more income per dollar invested than one yielding 2%. However, a very high yield can be a warning sign — it may mean the stock price has fallen sharply, the company is in trouble, or the dividend is at risk of being cut.

Yield changes constantly because stock prices move every day while companies usually keep their dividend the same until they announce a change. A stock you bought at $50 with a 3% yield might have a 4% yield a month later if the price drops to $40, even though the company did not increase the dividend.

Taxes on dividend income

Dividend income is taxable in the year you receive it. The tax rate depends on whether the dividend is may have access to or non-may have access to. may have access to dividends are taxed at the same rate as long-term capital gains — currently 0%, 15%, or 20% depending on your income level. Non-may have access to dividends are taxed as ordinary income at your regular tax rate, which is usually higher.

Most dividends from U.S. companies are may have access to if you held the stock for at least 60 days around the ex-dividend date. Dividends from real estate investment trusts (REITs), preferred stocks, and some other investments are usually non-may have access to. Your brokerage sends you a Form 1099-DIV each January showing how much you received and how much is may have access to.

If you own dividend stocks in a retirement account like a 401(k) or IRA, you do not pay tax on the dividends in that year. The tax is deferred until you withdraw money from the account, or in the case of a Roth IRA, you may not pay tax at all.

Risks and reasons dividends change

A dividend is not a may provide. Companies cut or eliminate dividends when profits fall, when they need cash for emergencies or major investments, or when the board decides to redirect money elsewhere. During recessions or industry downturns, many companies slash dividends to preserve cash.

If a company you own cuts its dividend, the stock price often falls because income-focused investors sell. This can hurt both your dividend income and the value of your shares. Some investors monitor company earnings reports and debt levels to spot warning signs before a cut happens.

On the other hand, companies that have raised their dividend for many years in a row — called dividend aristocrats — have a track record of prioritizing shareholder income. These stocks are often considered more stable, though past performance does not may provide future results.

Reinvesting dividends

When you receive a dividend, you can take the cash or reinvest it by buying more shares of the same stock. Many brokerages offer dividend reinvestment plans (DRIPs) that automatically buy new shares with your dividend payments, sometimes without charging a commission.

Reinvesting can accelerate growth over time because you earn dividends on your new shares in future periods — a compounding effect. However, you still owe taxes on the dividends in the year you receive them, even if you reinvest the money instead of taking it as cash. You will need to report the reinvested amount on your tax return.

Frequently Asked Questions

Do I have to own a stock for a certain amount of time to get a dividend?

You must own the stock before the ex-dividend date set by the company. If you buy on or after that date, you will not receive the upcoming dividend. The ex-dividend date is usually about one week before the record date. You can sell the stock the day after the ex-dividend date and still receive the payment.

What happens to the stock price when a dividend is paid?

The stock price typically drops by roughly the dividend amount on the ex-dividend date because the payment is no longer part of what you own. This is a normal adjustment, not a loss. If you reinvest the dividend, you buy more shares at the lower price.

Can a company stop paying dividends?

Yes. Companies cut or eliminate dividends when profits decline, when they need cash for other purposes, or when the board votes to change strategy. There is no legal requirement to maintain a dividend. Many companies suspended dividends during the 2008 financial crisis and the 2020 pandemic.

Are dividends better than capital gains?

It depends on your situation and goals. Dividends provide regular income but are taxable each year. Capital gains let you control when you sell and pay taxes. Some investors prefer dividend stocks for steady income; others prefer growth stocks that may increase in value faster over time.

How do I report dividends on my taxes?

Your brokerage sends you a Form 1099-DIV by January 31 showing all dividends received. You report this on your tax return. may have access to dividends go on Schedule B; non-may have access to dividends are reported as ordinary income. If you reinvested dividends, you still report the full amount received.