Dividend
A dividend is a payment a company makes to its shareholders, usually in cash, out of its profits or reserves.
Some companies share part of their profits with shareholders by paying dividends — usually in cash, often every quarter. For investors they are a source of income; for traders they create specific dates when share prices adjust. This entry explains how dividends work, the dates that decide who gets paid, why the share price drops when a stock goes ex-dividend, and what to check before relying on a dividend.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 4 min
- Also called
- Dividends, Special dividend, Cash dividend
- Updated
Dividends in plain words
A dividend is a portion of a company’s profit paid to shareholders. Companies that pay usually do so on a fixed schedule, though they can pay at any time; extra, unscheduled payments are called special dividends.1
To receive a dividend, two dates matter: the record date, when you must be on the company’s books as a shareholder, and the ex-dividend date.2 Buy on or after the ex-date and the seller gets the payment. See Ex-Dividend, Record and Payment Dates.
How a dividend payment works, step by step
Declaration
The company announces the amount and the dates.
Ex-dividend date
Shares start trading without the right to this dividend.
Record date
The company checks who its shareholders are.
Payment date
Cash arrives in shareholders’ accounts.
Price adjustment
On the ex-date the price usually drops by roughly the dividend.
Tax
Dividends are usually taxable income; rules differ by country.
Worked examples
Example 1 — Dividend income
IncomeYou own 300 shares. The company pays $0.50 per share each quarter.
| Per quarter | 300 × $0.50 = $150 |
| Per year | $600 |
Dividends provide regular cash, separate from changes in the share price.
Example 2 — The ex-date price drop
AdjustmentA stock closes at $40.00 the day before going ex-dividend for a $1.00 dividend.
| Expected opening price | ≈ $39.00 |
| Dividend received | $1.00 |
| Net effect | ≈ $0 |
Buying just before the ex-date does not create free money; the price adjusts.
Example 3 — Shorts pay the dividend
Short costA trader is short 200 shares over an ex-date for a $0.75 dividend.
| Owed to the lender | 200 × $0.75 = $150 |
Short sellers must pay dividends on borrowed shares. See Short Selling.
Ways companies return cash
| Aspect | How it works | Effect for shareholders |
|---|---|---|
| Regular dividend | Scheduled cash payments | Steady income |
| Special dividend | One-off extra payment | Irregular windfall |
| Share buyback | Company buys its own shares | Fewer shares; EPS rises. See Earnings per Share |
| Stock dividend | Extra shares instead of cash | More shares, same total value |
Why dividends matter
Income investing
Regular cash from holdings. See Dividend Yield.
Total return
Dividends are part of long-term returns.
Trading around ex-dates
Prices and options adjust for dividends. See Options.
Company health
Cuts can signal problems; steady growth can signal strength.
Advantages and disadvantages
Advantages
- Provides regular income.
- Can signal stable, profitable businesses.
- Contributes to long-term total return.
Disadvantages
- Can be cut or cancelled at any time.
- Usually taxed as income.
- Share price drops on the ex-date.
- High payouts can limit reinvestment in growth.
Going deeper
Read as far as you need. Each level builds on the one before it.
Not free money
Beginner
The cash comes out of the company’s value, so the share price falls by about the dividend amount on the ex-date.
Sustainability
Intermediate
Check the payout ratio and cash flow before trusting a dividend. Payouts larger than profits are hard to sustain. See Payout Ratio.
Dividends and options
Advanced
Expected dividends lower call prices and raise put prices, and can lead to early exercise of call options just before the ex-date.
Common mistakes
Buying just before the ex-date for the dividend
The price adjusts.
Chasing the highest yield
Very high yields can precede cuts.
Forgetting taxes
Net income is lower than the headline dividend.
Shorting over ex-dates without planning
Shorts owe the dividend.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A dividend is a payment of profits to shareholders.
- Own the shares before the ex-dividend date to receive it.
- The share price usually drops by about the dividend on the ex-date.
- Dividends can be cut; check sustainability.
- Short sellers must pay dividends on borrowed shares.
Frequently asked questions
How often are dividends paid?
Can I live off dividends?
Do all companies pay dividends?
Further learning
- Dividend Yield
Dividends relative to the share price.
- Earnings
Where dividends come from.
- Short Selling
Why shorts pay dividends.
- Stock Split and Reverse Split
Another corporate action that changes per-share figures.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Dividend (glossary) (opens in a new tab) Checked .
- Investor.gov (SEC). Ex-Dividend Dates: When Are You Entitled to Stock and Cash Dividends (opens in a new tab) Checked .
Read more elsewhere
- Investopedia: Dividend (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.