What is a dividend?
Dividends are such a simple concept you probably don’t even need a Jargon Hack to explain. But we are giving you one anyway, because we think they’re worthy of some words.
A dividend is a distribution of a company’s earnings, a divvying up.
Say Coca-Cola makes some profit. And say you own shares of Coca-Cola. If those shares pay dividends (not all do), you get a certain amount of the profit the company distributes to its shareholders. That amount is determined by how many shares you have. This is called ‘pro-rata’ in finance speak, which just means proportional. Your share of the dividends is in proportion to how many shares you own.
Dividends are almost always paid out in cash payments (occasionally additional shares of stock are issued, but it’s usually cash). And these payments usually occur four times a year (at the end of every quarter).
If any of your investments with Stash pay dividends (and we are guessing with your balanced portfolio you’ve got a few), your dividends are received as cash and go into your Stash Cash, so you can re-invest them as you see fit! You can view a history of this in your Activity page. Stash also notifies you when you receive a dividend.
It’s a good idea to reinvest your dividends, rather than cashing out and keeping them as profit. In fact, there’s even a term for this:
Dividend reinvestment is pretty much what it sounds like. You get a dividend payment, and rather than taking the cash and splurging on an extra fancy latté, you reinvest your dividends and set the stage to maybe someday splurge on an extra fancy latté machine (or kettle, for you tea drinkers out there!)
Looking for an investment with a history of showing you the dividend dollars?
Check out Delicious Dividends. This ETF is structured to include companies that have historically paid high levels of dividends, Coca-Cola included! Companies that pay large cash dividends relative to their stock prices are said to have high dividend yields.
This is a ratio that shows cash dividends relative to a stock’s price (translation: what you can expect to get based on what you put in and how a stock is trading). This is expressed as a percentage. Sort of like a recipe. The quantity of the flour you use helps you determine how many muffins you get out. As with baking, there are a lot of factors besides flour; this is just a way to understand how much cash flow relative to a stock’s price you can expect from each share (or fractional share) you own.
Of course, tasty baked goods are not cash payments, and your dividend yield is not a gluten filled treat. So let’s check out what this looks like in dollars and percentages.
The relationship looks like this:
Yields are usually estimated based on the previous year’s dividend payments, and payment schedules are set in advance, making them somewhat predictable. However, the dividend yield of a stock is directly affected by the price of a company’s stock, so there’s no crystal ball. No one can predict the future, but historical price and dividend data can help us better understand yields.
Keep reading: Now That’s What I Call an Investment! ETFs Explained