Dividend
A share of a company's profits paid out to shareholders, usually in cash and usually every quarter.
What Dividend means
A dividend is a distribution of earnings from a company to its shareholders. Established, profitable firms that no longer need to reinvest everything they earn are the typical payers; young growth companies usually pay nothing.
Dividend yield expresses the annual payout as a percentage of the share price. A very high yield often signals a falling share price rather than generosity, and can precede a cut.
Qualified dividends are taxed at long-term capital gains rates rather than as ordinary income, provided you meet a holding-period requirement. Dividends from REITs and some foreign companies do not qualify.
Reinvesting dividends rather than spending them is one of the most reliable ways to let compounding work — historically, reinvested dividends account for a large share of the stock market's total long-run return.
Related terms
Capital Gains
The profit from selling an asset for more than you paid, taxed at a lower rate if you held it longer than a year.
Compound Interest
Interest earned on both your original money and the interest already added to it, which makes balances grow faster over time.
Index Fund
A fund that mechanically tracks a market index rather than picking stocks, giving broad exposure at very low cost.
ETF (Exchange-Traded Fund)
A fund holding a basket of investments that trades on an exchange like a single stock, usually tracking an index at low cost.
Expense Ratio
The annual percentage of your investment that a fund charges to operate, deducted automatically from returns.
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