Jargon-Free Glossary

Let's Talk About Dividends - What Are They And How Do They Work?

Learn what a dividend is, how they work, and how you receive them.

Are dividends a good investing strategy?

To answer that, we need to understand what they are and how they work. But before we talk about dividends, let's talk about stock (we broke down what a stock is in our instagram post but read on for a quick summary).

Stock is a portion of a company you own.

Own Apple stock? Then you own a small, tiny, itty bitty piece of Apple. Companies offer up parts of their company as a way to raise money for the business.

When you buy stock, you can choose to buy stock in companies that offer dividends. So how do dividends work?

As a company makes profit, they share that profit with their stakeholders (that's you, the person owning their stock) in the form of dividends.

Think of it like a little "thank you" from the company. You put your money in them by buying their shares, and in turn, they thank you every quarter or so by sharing some of their profit with you. Usually it's something small like 1-2% but over time, this adds up. The more shares you own, the more dividends you get.

Not all companies pay dividends. A lot of companies choose to take their profits and reinvest it back into their own company to help it grow. That's why usually the older and more established companies like Cisco, Coca-Cola, and Target are likely to pay dividends.

So how do you get dividends?

And what happens with the dividends you received?" There are a few options.

  • Cold hard cash. This is the most common way to receive dividends and the company will directly pay you the amount by depositing it into your brokerage account.
  • Stock dividends. Instead of getting cash, you may get more stock.
  • Dividend reinvesting. Also known as Dividend Reinvesting Programs (DRIPs). You take your dividend cash and buy more stock at a discount.

Why do I keep hearing about the ex-dividend date?

If you want to receive a dividend, then you need to own that stock before the ex-dividend date. If you purchase after, you won't get the dividend. But you can sell the stock after the ex-dividend date and still receive the dividend.

We'll cover how to assess dividend stock, how to search for them, and how to find the ex-dividend date in a future blog post!

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