What is a Dividend? A Simple Explanation + 4 Tips

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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.

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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).

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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.

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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.

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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.

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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.

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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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