How dividends work

A dividend is a company handing part of its profit to its owners. If you hold one share out of a million, you own one millionth of the business — and one millionth of any payout it declares. That is the whole idea; the rest is mechanics and dates.

Where the money comes from

Dividends are paid out of what a company has earned and kept. The board of directors decides whether to pay, how much, and when — shareholders do not vote a dividend into existence. A company with no profit can still pay one for a while from past reserves, and a profitable company can pay nothing at all and reinvest instead. Neither choice is automatic, and no dividend is guaranteed to continue.

The four dates

Every dividend runs on the same calendar. The declaration date is the announcement. The ex-dividend date is the cut-off: buy the share on or after this day and the upcoming payment goes to the seller, not to you. The record date is when the shareholder register is checked, and the payment date is when cash arrives. Of the four, the ex-dividend date is the one that matters to a buyer.

Why the price adjusts

On the ex-dividend date, the share tends to open lower by roughly the dividend amount — and it must. The day before, buying the share meant buying the payment too; the day after, it does not. Purely hypothetical arithmetic: a share trading at 100 that goes ex-dividend on a payment of 2 would, all else equal, open near 98. Nothing was lost — the 2 is on its way to the previous day's owners. This is also why "buy just before the dividend" is not free money: the price gives back what the payment hands out.

Yield, and how to read it

Dividend yield is the yearly payout divided by the share price. Hypothetically: a company paying 3 per year on a share priced at 100 yields 3%. Note what the arithmetic implies — if the price halves and the payout holds, the yield doubles to 6% without the company improving at all. An unusually high yield is as often a falling price as a generous company, which is why yield is a question to investigate, never an answer by itself.

What this is not

None of this says whether dividends are better than growth, or which shares to buy — that depends on circumstances no article knows. Dividends are also typically taxable, and the rules differ by country and account type; the rate tables live with your tax authority, not here. For where dividends fit among the other ways money is earned, see how people make money; for the pooled version, see what is an index fund.