Companies share profit by paying dividends
A dividend is part of a company’s profit that is paid out to shareholders, typically once or twice a year. It is a way share holders get returns from share investing (in addition to rises and falls in share prices). Not all listed companies pay dividends and there is no guarantee that companies that paid a dividend in the past will do so in the future. Personal finance website Investopedia and well-known magazine The Economist offer definitions of a dividend.
Let’s calculate the dividend yield
A dividend is usually expressed as the amount paid per share. This way of expressing the dividend also gives rise to the important term “dividend yield”. If a share has a current market price of €100, for example, and a dividend of €5 is paid for each share, the dividend yield is 5%. The dividend yield is sometimes used to compare the value of shares with other investments, such as bonds or cash at the bank. But remember investing shares is often riskier than investing in bonds or cash, with conventional wisdom indicating there is a higher likelihood of an investor losing their original investment.
Dividends can help investments grow
So, why are dividends important to investors? There are several reasons including, some investors rely on dividend income to help pay living costs, changes in dividend payments may give helpful information about the financial health of a company and reinvesting dividends back into the market usually helps the original investment grow larger over time. For more about share market investing – including the importance of diversification – see the eZonomics video The share market has risen. Is it too late to dive in?.