What is a Dividend?

A dividend is a payment to shareholders made by a company from its profits or cash reserves. In fact, the word comes from the Latin, dividendum, meaning thing to be divided.

Dividends can be received either in cash or shares or stock, paid quarterly, semi-annually, annually or sometimes monthly. However, dividends are dependent on the profits of a company and therefore, are not guaranteed. Companies can change their dividend policy at any time, with the board of directors deciding the level of earnings to be paid out.

Not all companies pay dividends. In general, dividend-paying companies tend to be large and generate a high level of cash. Smaller companies or businesses focused on growth may not pay dividends, as they use their profits to reinvest in the business.

Dividend income has long been an important component of investors’ returns. Since 1926, dividends have made up approximately one-third of the total return of the S&P 500 Index, according to S&P Dow Jones Indices.

Jemma Everyday Wisdom: For long-term investors, dividends—especially when reinvested—play a significant role in an investor’s portfolio. Therefore, you don’t need to own one dividend-paying company to benefit. Rather, there are investments, including mutual funds, that help you access the power of dividends.