What is a Dividend?

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DEFINITION:

A dividend is a payment made by a company to its shareholders to give them a share of the company’s profits – dividends are often paid quarterly and in cash.

Understanding dividends

Investors in the stock market can earn a return in two ways: price appreciation and dividends. A dividend is a payment from a company to its shareholders that allows them to share in the company’s profits. Dividends are often paid quarterly and in cash. However, companies don’t necessarily have to pay dividends – depending on their financial position or plans, they may reinvest their profits by, for example, hiring more employees or expanding into new product lines. Dividends are usually paid by mature companies, not by early- stage companies.

EXAMPLE

Utility companies are often mature businesses with relatively consistent earnings, so they typically pay dividends to their shareholders. By comparison, younger technology companies are usually focused on growth, so they may prefer to reinvest any profits back into themselves. NextEra Energy, for example, paid a dividend of $1.40 per share in the third quarter of 2020, while GoPro had never paid a dividend until the third quarter of 2020.

Takeaway

A dividend is like a ripe coconut falling from a tree…

When a coconut falls from the tree, it is as if the tree is a company that returns some of its fruit to you. As an investor, you have the choice of keeping the coconut (and perhaps cooking a coconut curry) or planting it in the hope that another tree will grow.

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