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What Is a Dividend and How Do They Work?
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What Is a Dividend and How Do They Work?
Dividends are regular payments of profit made to investors who own a company's stock.
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You can earn a dividend if you own stock in a company that pays dividends, such as Exxon Mobil (XOM) or Verizon (VZ).
What is a dividend?
What is a dividend?A dividend is a payment from a company to its investors. Not all stocks pay dividends. If you are interested in investing for dividends, you will want to specifically choose dividend stocks.
A dividend is a payment from a company to its investors. Not all stocks pay dividends. If you are interested in investing for dividends , you will want to specifically choose dividend stocks.Companies that increase their dividend payments year after year are usually less volatile than the broader market. And the steady income from dividends can help smooth out a stock’s total return.
Companies that increase their dividend payments year after year are usually less volatile than the broader market. And the steady income from dividends can help smooth out a stock’s total return.» Need a brokerage account? Check out our picks for the best online brokerages for dividend investing
» Need a brokerage account? » Need a brokerage account? Check out our picks for the best online brokerages for dividend investingHow do dividends work?
How do dividends work?Imagine you own 30 shares in a company and that company pays $2 in annual cash dividends. You will receive $60 per year. Here’s how it works.
Imagine you own 30 shares in a company and that company pays $2 in annual cash dividends. You will receive $60 per year. Here’s how it works.1. A company earns profits.
1. A company earns profits.2. The company’s board of directors approve a plan to share those profits in the form of a dividend. A dividend is paid per share of stock. U.S. companies usually pay dividends quarterly, monthly or semiannually.
2. The company’s board of directors approve a plan to share those profits in the form of a dividend. A dividend is paid per share of stock. U.S. companies usually pay dividends quarterly, monthly or semiannually.3. The company announces when the dividend will be paid, the amount and the ex-dividend date. Investors must have bought the stock at least two days before the official date of a dividend payment (the "date of record") in order to receive that payment.
3. The company announces when the dividend will be paid, the amount and the ex-dividend date. Investors must have bought the stock at least two days before the official date of a dividend payment (the "date of record") in order to receive that payment.4. The company pays out the dividend to shareholders.
4. The company pays out the dividend to shareholders.The ex-dividend date is extremely important to investors: Investors must own the stock by that date to receive the dividend. Investors who purchase the stock after the ex-dividend date will not be eligible to receive the dividend. Investors who sell the stock after the ex-dividend date are still entitled to receive the dividend, because they owned the shares as of the ex-dividend date.
The ex-dividend date is extremely important to investors: Investors must own the stock by that date to receive the dividend. Investors who purchase the stock after the ex-dividend date will not be eligible to receive the dividend. Investors who sell the stock after the ex-dividend date are still entitled to receive the dividend, because they owned the shares as of the ex-dividend date.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.
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.Companies that pay dividends
Companies that pay dividendsDividends on common stock — like any investment — are never guaranteed. However, dividends are more likely to be paid by well-established companies that no longer need to reinvest as much money back into their business. As a result, stocks that pay dividends can provide a stable and growing income stream.
Dividends on common stock — like any investment — are never guaranteed. However, dividends are more likely to be paid by well-established companies that no longer need to reinvest as much money back into their business. As a result, stocks that pay dividends can provide a stable and growing income stream.Dividends are considered an indication of a company's financial well-being. Once a company establishes or raises a dividend, investors expect it to be maintained, even in tough times. Investors often devalue a stock if they think the dividend will be reduced, which lowers the share price.
Dividends are considered an indication of a company's financial well-being. Once a company establishes or raises a dividend, investors expect it to be maintained, even in tough times. Investors often devalue a stock if they think the dividend will be reduced, which lowers the share price.According to research from Fidelity, during periods of inflation, “stocks that increased their dividends the most outperformed the broad market, on average
According to research from Fidelity, during periods of inflation, “stocks that increased their dividends the most outperformed the broad market, on average Fidelity. The Power of Dividends Now. Accessed Dec 18, 2024. ."The most reliable American companies have a record of growing dividends — with no cuts — for decades. Examples of companies that pay dividends include Exxon, Target, IBM, Sherwin-Williams Co., and Johnson & Johnson. An elite list of S&P 500 stock companies called the dividend aristocrats have increased their dividend every year for at least 25 years. By comparison, high-growth companies, such as tech or biotech companies, rarely pay dividends because they need to reinvest profits into expanding that growth.
The most reliable American companies have a record of growing dividends — with no cuts — for decades. Examples of companies that pay dividends include Exxon, Target, IBM, Sherwin-Williams Co., and Johnson & Johnson. An elite list of S&P 500 stock companies called the dividend aristocrats have increased their dividend every year for at least 25 years. By comparison, high-growth companies, such as tech or biotech companies, rarely pay dividends because they need to reinvest profits into expanding that growth.Brokerage firms
Brokerage firms
Brokerage firmson Charles Schwab's website
on E*TRADE's website
on Vanguard's website
on Fidelity's website
How to evaluate dividends
How to evaluate dividendsAn investor can use different methods to learn more about a company's dividend and compare it to similar companies.
An investor can use different methods to learn more about a company's dividend and compare it to similar companies.Dividend per share (DPS)
Dividend per share (DPS)Companies that can increase dividends year after year are often more attractive to investors. The dividend per share calculation shows the amount of dividends distributed by the company for each share of stock during a certain time period. Keeping tabs on a company’s DPS allows an investor to see which companies are able to grow their dividends over time.
Companies that can increase dividends year after year are often more attractive to investors. The dividend per share calculation shows the amount of dividends distributed by the company for each share of stock during a certain time period. Keeping tabs on a company’s DPS allows an investor to see which companies are able to grow their dividends over time.Dividend yield
Dividend yieldFinancial websites or online brokers will report a company’s dividend yield, which is a measure of the company’s annual dividend divided by the stock price on a certain date.
Financial websites or online brokers will report a company’s dividend yield, which is a measure of the company’s annual dividend divided by the stock price on a certain date.The dividend yield evens the playing field and allows for a more accurate comparison of dividend stocks: A $10 stock paying $0.10 quarterly ($0.40 per share annually) has the same yield as a $100 stock paying $1 quarterly ($4 annually). The yield is 4% in both cases.
The dividend yield evens the playing field and allows for a more accurate comparison of dividend stocks: A $10 stock paying $0.10 quarterly ($0.40 per share annually) has the same yield as a $100 stock paying $1 quarterly ($4 annually). The yield is 4% in both cases.Yield and stock price are inversely related: When one goes up, the other goes down. So, there are two ways for a stock’s dividend yield to go up:
Yield and stock price are inversely related: When one goes up, the other goes down. So, there are two ways for a stock’s dividend yield to go up:The company could raise its dividend. A $100 stock with a $4 dividend might see a 10% increase in its dividend, raising the annual payout to $4.40 per share. If the stock price doesn’t change, the yield becomes 4.4%.
The company could raise its dividend. The company could raise its dividend. A $100 stock with a $4 dividend might see a 10% increase in its dividend, raising the annual payout to $4.40 per share. If the stock price doesn’t change, the yield becomes 4.4%.The stock price could go down while the dividend remains unchanged. That $100 stock with a $4 dividend might decline to $90 per share. With that same $4 dividend, the yield would become just over 4.4%.
The stock price could go down while the dividend remains unchanged. The stock price could go down while the dividend remains unchanged. That $100 stock with a $4 dividend might decline to $90 per share. With that same $4 dividend, the yield would become just over 4.4%.Dividend payout ratio
Dividend payout ratioAdvisors say one of the quickest ways to measure a dividend’s safety is to check its payout ratio, or the portion of its net income that goes toward dividend payments. If a company pays out 100% or more of its income, the dividend could be in trouble. During tougher times, earnings might dip too low to cover dividends. Like a stock's dividend yield, the company's payout ratio will be listed on financial or online broker websites.
Advisors say one of the quickest ways to measure a dividend’s safety is to check its payout ratio, or the portion of its net income that goes toward dividend payments. If a company pays out 100% or more of its income, the dividend could be in trouble. During tougher times, earnings might dip too low to cover dividends. Like a stock's dividend yield, the company's payout ratio will be listed on financial or online broker websites. 🤓 Nerdy TipBe sure to check the stock's dividend payout ratio, or the portion of a company’s net income that goes toward dividend payments. Payout ratios are one measure of dividend health, and they are listed on financial or online broker websites.
Be sure to check the stock's dividend payout ratio, or the portion of a company’s net income that goes toward dividend payments. Payout ratios are one measure of dividend health, and they are listed on financial or online broker websites.6 types of dividends
6 types of dividendsUsually, dividends are paid out on a company’s common stock. There are several types of dividends a company can choose to pay out to its shareholders.
Usually, dividends are paid out on a company’s common stock . There are several types of dividends a company can choose to pay out to its shareholders.1. Cash dividends
1. Cash dividendsThe most common type of dividend. Companies generally pay these in cash directly into the shareholder's brokerage account.
The most common type of dividend. Companies generally pay these in cash directly into the shareholder's brokerage account.2. Stock dividends
2. Stock dividendsInstead of paying cash, companies can also pay investors with additional shares of stock.
Instead of paying cash, companies can also pay investors with additional shares of stock.3. Dividend reinvestment programs (DRIPs)
3. Dividend reinvestment programs (DRIPs)Investors in DRIPs are able to reinvest any dividends received back into the company's stock, often at a discount. DRIPs typically aren't mandatory; investors can choose to receive the dividend in cash instead.
Investors in DRIPs are able to reinvest any dividends received back into the company's stock, often at a discount. DRIPs typically aren't mandatory; investors can choose to receive the dividend in cash instead.4. Special dividends
4. Special dividendsThese dividends pay out on all shares of a company’s common stock, but don’t recur like regular dividends. A company often issues a special dividend to distribute profits that have accumulated over several years and for which it has no immediate need.
These dividends pay out on all shares of a company’s common stock, but don’t recur like regular dividends. A company often issues a special dividend to distribute profits that have accumulated over several years and for which it has no immediate need.5. Preferred dividends
5. Preferred dividendsPayouts issued to owners of preferred stock. Preferred stock is a type of stock that functions less like a stock and more like a bond. Dividends are usually paid quarterly, but unlike dividends on common stock, dividends on preferred stock are generally fixed.
Payouts issued to owners of preferred stock . Preferred stock is a type of stock that functions less like a stock and more like a bond. Dividends are usually paid quarterly, but unlike dividends on common stock, dividends on preferred stock are generally fixed.6. Dividend funds
6. Dividend fundsInvestors who don't want to research and pick individual dividend stocks to invest in might be interested in dividend mutual funds and dividend exchange-traded funds (ETFs). These funds are available to a range of budgets, hold many dividend stocks within one investment and distribute dividends to investors from those holdings.
Investors who don't want to research and pick individual dividend stocks to invest in might be interested in dividend mutual funds and dividend exchange-traded funds (ETFs) . These funds are available to a range of budgets, hold many dividend stocks within one investment and distribute dividends to investors from those holdings.Are dividends taxed?
Are dividends taxed?All types of dividends are taxable. Dividends paid by U.S.-based or U.S.-traded companies to shareholders who have owned the stock for at least 60 days are called qualified dividends and are subject to capital gains tax rates. All other dividends are subject to ordinary income tax rates.
All types of dividends are taxable . Dividends paid by U.S.-based or U.S.-traded companies to shareholders who have owned the stock for at least 60 days are called qualified dividends and are subject to capital gains tax rates. All other dividends are subject to ordinary income tax rates.Dividend vs. growth stocks
Dividend vs. growth stocksLearn more about the difference between dividend and growth stocks, and what they add to your portfolio.
Learn more about the difference between dividend and growth stocks, and what they add to your portfolio.Next steps
Next stepsBest Online Brokerages for Dividend Investing
Best Online Brokerages for Dividend Investing20 High-Dividend Stocks and How to Invest
20 High-Dividend Stocks and How to InvestThe Top 7 Dividend Aristocrats by Yield
The Top 7 Dividend Aristocrats by Yield9 Highest-Yielding Monthly Dividend Stocks
9 Highest-Yielding Monthly Dividend Stocks Neither the author nor editor held positions in the aforementioned investments at the time of publication. Neither the author nor editor held positions in the aforementioned investments at the time of publication. Neither the author nor editor held positions in the aforementioned investments at the time of publication.Helpful resources
Helpful resources How to Start Investing in Stocks Individual Retirement Account (IRA): What It Is & How It Works The Best Index Funds and How to Start Investing More like this Investment Basics Investing Stocks Investment Calculator Use our free investment return calculator to estimate how your money can grow. Enter your planned contributions, timeline, rate of return and compounding frequency to get started. Chris Davis Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana The Best-Performing Stocks in 2026 (By One-Year Returns) These are the best 21 stocks in the S&P 500 right now, based on 1-year performance. 2 By Arielle O'Shea, Chris Davis Investing in Dividend Stocks: Guide, Calculator and Top 7 Yields for June 2026 Dividend stocks can be a great choice for investors looking for passive income and portfolio stability. Here's what to look for when evaluating dividend stocks and how to invest in them. 2 By Chris Davis, Sam Taube What Is a Brokerage Account? Where and How to Open One Opening a brokerage account is the first step to investing. You can open one in as little as 15 minutes, but you'll need to fund it and select investments to start building out your portfolio. 2 By Arielle O'Shea, Pamela de la Fuente Best Brokerage Accounts for Online Investing and Stock Trading in 2026 Based on hours of analysis and hands-on testing, here are our picks for the best brokerage accounts based on their low fees, strong platforms, quality customer support and other factors. Chris Davis Investment Calculator Use our free investment return calculator to estimate how your money can grow. Enter your planned contributions, timeline, rate of return and compounding frequency to get started. Chris Davis Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana The Best-Performing Stocks in 2026 (By One-Year Returns) These are the best 21 stocks in the S&P 500 right now, based on 1-year performance. 2 By Arielle O'Shea, Chris Davis Investing in Dividend Stocks: Guide, Calculator and Top 7 Yields for June 2026 Dividend stocks can be a great choice for investors looking for passive income and portfolio stability. Here's what to look for when evaluating dividend stocks and how to invest in them. 2 By Chris Davis, Sam Taube What Is a Brokerage Account? Where and How to Open One Opening a brokerage account is the first step to investing. You can open one in as little as 15 minutes, but you'll need to fund it and select investments to start building out your portfolio. 2 By Arielle O'Shea, Pamela de la Fuente Best Brokerage Accounts for Online Investing and Stock Trading in 2026 Based on hours of analysis and hands-on testing, here are our picks for the best brokerage accounts based on their low fees, strong platforms, quality customer support and other factors. Chris Davis Investment Calculator Use our free investment return calculator to estimate how your money can grow. Enter your planned contributions, timeline, rate of return and compounding frequency to get started. Chris Davis Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana The Best-Performing Stocks in 2026 (By One-Year Returns) These are the best 21 stocks in the S&P 500 right now, based on 1-year performance. 2 By Arielle O'Shea, Chris Davis Investing in Dividend Stocks: Guide, Calculator and Top 7 Yields for June 2026 Dividend stocks can be a great choice for investors looking for passive income and portfolio stability. Here's what to look for when evaluating dividend stocks and how to invest in them. 2 By Chris Davis, Sam Taube