What is a Dividend? A Simple Explanation + 4 Tip

Whether you are just starting to invest or have been investing for decades, dividends can be a valuable part of anyone's investing portfolio. However, you'll typically see dividends associated with those getting closer to retirement who are not looking for as much growth in their investments but are more so looking to supplement their income.

What Is a Dividend?

Let's first define what exactly a dividend is. Generally speaking, a dividend is a distribution of a portion of a company's earnings paid to the shareholders.

Dividend Example

Let's use a basic example of how a dividend might work. Company X has a share price of $100, and you own 100 shares. Company X announces they will pay a $1.50 dividend per share on the next payment date (companies announce dividend amounts several weeks before the payment).On the payment day, you'll receive $150 worth of dividends. 

Why Companies Pay Dividend

So why would a company want to pay out some of its profits? The simple answer is to attract more investors. Many companies that payout dividends are well-established and stable companies. By paying a dividend, they attract investors creating more demand for their stock.

Many companies won't pay dividends for several reasons, the biggest being it hurts their bottom line. That is much less cash the company has and is therefore much less valuable when paying out dividends. Usually, companies just starting up, like a new online business, are more mindful of their cash flow.

Why Companies Don't Pay Dividend

-Walmart -Exxon Mobil -PepsiCo -Procter and Gamble

Four Companies That Pay Dividend

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