What is a Dividend?

A dividend is a portion of a company's profits that is distributed to shareholders, who are people that own that company's stock. It's like a reward that companies give to their shareholders for investing in them. Dividends can provide an extra income stream in addition to any money made from selling the stock for a higher price than what was originally paid. Dividends are usually given as cash, but sometimes can be in the form of additional shares of the company.

3 things to know about Dividends

1. Dividends are not guaranteed: While some companies have a long history of consistently paying dividends, they are not obliged to do so. The decision to distribute dividends is taken by a company's board of directors and can be changed at any time.

2. Dividends can be reinvested: Many investors choose to reinvest their dividends back into the company through a dividend reinvestment plan (DRIP). By doing this, they increase the number of shares they own which could lead to larger future dividends.

3. Dividend-paying stocks can provide income in bear markets: Even when the stock market is down and stock prices are falling, investors in dividend-paying stocks can still receive dividend payments, making these stocks potentially attractive in bear markets.

Are dividends taxed?

Yes, dividends are typically subject to taxes. In the U.S., qualified dividends are taxed at a lower capital gains rate, while nonqualified dividends are taxed as regular income. However, tax laws can vary depending on the jurisdiction and circumstances, so it's advisable to consult with a trusted tax advisor or the relevant tax authority.

Here are some sources to provide more detailed information:

1. IRS Tax Topic on Dividends: https://www.irs.gov/taxtopics/tc404

2. Internal Revenue Service guide on Qualified Dividends: https://www.irs.gov/publications/p550#en_US_2019_publink100010315

Citations and links

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What is a Dividend?