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Dividends: What They Are and How They Work
March 30, 2026 · 1 min read
Dividends are payments that some companies make to their shareholders, distributing a portion of their profits.
How Dividends Work
A company's board of directors decides whether to pay a dividend and how much. Dividends are typically paid quarterly (every three months), though some companies pay annually or semi-annually.
Key Terms
- Dividend yield: Annual dividend ÷ share price. A stock priced at $100 paying $3/year has a 3% yield.
- Ex-dividend date: The cutoff date — you must own the stock before this date to receive the next payment.
- Payout ratio: The percentage of earnings paid as dividends. A high ratio may mean less money reinvested in growth.
Not All Companies Pay Dividends
Growth companies often reinvest all profits back into the business instead of paying dividends. This is neither good nor bad — it depends on the company's stage and strategy.
Reinvestment
Some investors use dividends to buy more shares, compounding their returns over time. This is sometimes called a DRIP (Dividend Reinvestment Plan).