What is a Dividend? A Simple Explanation + 4 Tips

What is a Dividend? Let's first define what exactly a dividend is. Generally speaking, a dividend is a distribution of a portion of a company's earnings paid to the shareholders.

Let's use a basic example of how a dividend might work. Company X has a share price of $100, and you own 100 shares. Company X announces they will pay a $1.50 dividend per share on the next payment date (companies announce dividend amounts several weeks before the payment).

1. Gather All the Documents

On the payment day, you'll receive $150 worth of dividends. After that, however, the stock price will likely drop the same $1.50 as the company is technically worth that much less after paying its shareholders that amount per share.

Why Companies Pay Dividends

Many companies that payout dividends are well-established and stable companies. By paying a dividend, they attract investors creating more demand for their stock.

Why Companies Don't Pay Dividends

It hurts their bottom line. That is much less cash the company has and is therefore much less valuable when paying out dividends.

How Do You Earn A Dividend?

The company will automatically pay to your brokerage account at distribution time by buying a stock or mutual fund that pays out dividends.

Four Companies That Pay Dividends

As mentioned earlier, many of the companies that pay out dividends are long-standing, well-established companies. Here are some Examples:

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