Quick definition

Updated: Jan 20, 2023

A dividend is the portion of a company’s profits that it pays out to shareholders in set intervals. 

Key details

  • When a company begins to generate revenue, it might consider rewarding its shareholders by allocating a portion of this capital to them via a dividend. 
  • Dividend payouts take place at set intervals, though this can vary. Some companies pay them monthly, others quarterly, and others annually. 
  • Different stocks offer different dividend yields; this figure is calculated by dividing the dividend amount per share by the company’s share price. 

What is a dividend?

Dividends are payments a company makes to share profits with its stockholders. Both public and private companies can pay dividends, but in the case of the latter, the owners of the company are the sole beneficiaries. 

The primary reason public companies pay dividends is to retain shareholders and attract new investors. While a company’s share price may be up and down, maintaining consistent dividends can help instil a sense of trust and positivity, securing the business’s shareholder base. 

Most stocks that pay dividends are companies that have reached a certain level of maturity and scale. They need to be generating consistent reliable revenue, and they also need to be profitable for dividend payments to be sustainable. A company’s dividend yield will vary based on its earnings, and in general, larger companies tend to be more consistent. 

What to look for in a dividend stock

Investors typically look for a combination of capital growth and high dividend yield when buying dividend stocks. When you invest in a stock, you are tying up your money in one asset and hampering your liquidity; after all, that money could generate better returns elsewhere. As a result, it is important the stock you choose delivers value in terms of its share price as well as its dividends. 

Things to consider when investing in dividend stocks

Here are some of the key factors you need to take into account before choosing a dividend stock.

Dividend payouts

Dividend stocks pay out a percentage of the company’s earnings on a regular basis, and this is most commonly every three months (at the end of each fiscal quarter). The company’s dividend yield is expressed as a percentage and gives you a clear indication of how generous the company is with its dividends.

Consistency of payouts

Dividend payments are never guaranteed, and companies can stop paying dividends if they achieve poor financial results or are suffering due to depressed economic conditions. You need to make sure that the stock you choose has a track record of consistently and reliably delivering dividends of a certain yield. If a stock doesn’t offer the regular dividend payouts you are looking for, you may be better off looking elsewhere. 

Dividend growth

If the size of a company’s dividend yield increases over time, this is desirable and means you will be getting greater returns on your original investment.  In general, if a company performs well, it will often adjust its dividends upwards, so make sure the company you invest in has a clear pathway towards growth if you want to enjoy dividend accretion.

Potential price appreciation

If your sole aim when investing is to receive a series of regular payouts, you could just as easily open a savings account like an ISA or invest in real estate and rent a property out. The added benefit of dividend stocks is that they can also gain value, making them a more multifaceted investment with extra ways of generating returns. 

Some stocks will offer low dividends and high growth potential, while others will offer the reverse. Make sure you try to strike a balance between the two because the best combination is healthy dividend yields and strong growth credentials. 

Why should you invest in dividend stocks?

You should consider interesting in a dividend-paying stock because they make for stable, relatively safe investments and can provide a secure bedrock of passive income with which to build your life upon. 

As a result, they are particularly attractive options for retired or semi-retired individuals who don’t have large income streams but do have cash in the bank. They can simply invest in a stock and use dividends to enhance their cash flow. 

In addition, companies that can afford to pay consistent dividends are more likely to be good companies, meaning they are more likely to deliver sustained share price growth too. 

How do I find dividend stocks?

Plenty of investing websites allow you to filter stocks by their dividend yield, meaning it is easier than ever to find one that suits your financial needs and investment goals. In addition, we have provided an up-to-date list of the best dividend stocks this year on our website. 

Where can I learn more?

If you’d like to learn more about dividends, make sure you check out our stocks, cryptocurrencies and commodities hubs; they are the best places to get started.

Sources & references
Risk disclaimer

Invezz is a place where people can find reliable, unbiased information about finance, trading, and investing – but we do not offer financial advice and users should always carry out their own research. The assets covered on this website, including stocks, cryptocurrencies, and commodities can be highly volatile and new investors often lose money. Success in the financial markets is not guaranteed, and users should never invest more than they can afford to lose. You should consider your own personal circumstances and take the time to explore all your options before making any investment. Read our risk disclaimer >

Charlie Hancox
Financial Writer
Alongside his passion for trading, Charlie has represented Great Britain and won national championships as a water polo player, and as a budding film director, has… read more.