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A dividend is a distribution of a company's earnings to shareholders, typically paid in cash on a regular schedule as a way to share profits with investors.
A dividend is a distribution of a company's earnings to shareholders, typically paid in cash on a regular schedule. Dividends represent a direct return on investment and signal management's confidence in the company's financial stability and future cash generation.
Key dividend metrics:
Dividend Yield: Annual dividend per share divided by stock price, showing the income return percentage.
Dividend Yield = Annual Dividend Per Share / Stock Price
Payout Ratio: Percentage of earnings paid as dividends, indicating sustainability.
Payout Ratio = Dividends Per Share / Earnings Per Share
Dividend Growth Rate: Annual percentage increase in dividend payments over time, often measured over 5 or 10 years.
Important dates in the dividend cycle:
- Declaration Date: Board of directors announces the dividend amount and payment schedule
- Ex-Dividend Date: Cutoff date to receive the dividend—buyers on or after this date do not receive the declared dividend
- Record Date: Company checks shareholder registry to determine who receives payment
- Payment Date: Cash dividend is distributed to qualifying shareholders
Why dividends matter to investors:
- Income generation: Provides regular cash returns without selling shares
- Total return component: Dividends have historically contributed significantly to long-term equity returns
- Quality signal: Consistent dividends often indicate stable, mature businesses
- Discipline mechanism: Commitment to dividends can prevent wasteful spending
Evaluating dividend sustainability:
- Payout ratio below 60%: Generally sustainable for most industries
- Cash flow coverage: Free cash flow should exceed dividend payments
- Debt levels: High leverage can threaten dividend payments during downturns
- Earnings stability: Cyclical businesses may struggle to maintain dividends
Dividend-focused investment categories:
- Dividend Aristocrats: S&P 500 companies with 25+ consecutive years of dividend increases
- Dividend Kings: Companies with 50+ consecutive years of dividend increases
- High-yield stocks: Above-average yields, but requires careful analysis of sustainability
Warning signs for dividend investors:
- Very high yields: May signal an unsustainable payout or declining stock price
- Payout ratio above 100%: Company paying more than it earns—unsustainable long-term
- Dividend funded by debt: Borrowing to pay dividends is a red flag
- Declining earnings with maintained dividend: May precede a cut
Companies with long histories of growing dividends are often considered high-quality investments because the dividend track record demonstrates sustained profitability, financial discipline, and shareholder-friendly management.
Where it fits
Forward Annual Dividend YieldForward annual dividend yield is the expected dividend over the next year divided by the current share price. It shows the future income return as a percentage of today's price.→Dividend
Trailing Annual Dividend YieldTrailing annual dividend yield is last year's dividend divided by the current share price. It shows the recent income return based on today's price.→Dividend
Payout RatioPayout ratio shows how much of the company's earnings are paid out as dividends. Very high payout ratios can be hard to sustain, while very low ones can signal room to increase dividends.→Dividend
5-Year Average Dividend Yield5-year average dividend yield is the typical dividend yield the stock has offered over the past five years. It helps you see whether the current yield is high or low compared to history.