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Dividends: What Exactly Are They?

By Holly Chase - NextGenVest Director - University of Connecticut

“Dividend” is one of those soundbytes you may here as you click past CNN to get to the most recent episode of American Horror Story, but never really understood. Let’s get into what they actually are once and for all so you can sound smart in your Intro to Economics Class.

Definition: A dividend is “a cash distribution by a company to its shareholders.”

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Let’s take a step back: Who Are Shareholders in a Company?

Shareholders, or stockholders, are individual people who own shares of a company’s stock. They can own one or thousands of shares, and can buy and sell them at will on the stock market (think Nasdaq or NYSE). When can you own stock? Well first the company has to be “public” meaning it has a ticker symbol, is regulated by the SEC, and anyone can invest in it. Companies like Ben & Jerry’s, as a subsidiary of the public company Unilever, is public so you can buy and sell Unilever stock in an investment account.

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When Do Public Companies Issue Dividends?

When public companies have become well established and start to make consistent profit, the company can distribute these profits as dividends to people who own the stock. New companies do not often pay out dividends, as most profits they make get reinvested to help build the organization.

Let’s Take a Look At a Few Companies that Pay Out Dividends:

Coca Cola (Ticker: KO): 3.0%

Apple (Ticker AAPL): 1.7%

Shake Shack (Ticker TTM): 0%

PRO-Tip: Notice that Coca Cola and Apple are huge companies that have had stable profits for a long time. Shake Shack, which only recently went public, doesn’t pay out a dividend.

Why Do People Say “Dividend Yield”?

When researching the dividends of publicly traded companies, often the success is measured in terms of dividend yield. Dividend yield is the annual dividend dollar amount per share divided by the price per share. A higher dividend yield percentage is better for the shareholder! So for example, in the companies above, Coca-Cola has the best divident yield.

Who Gets to Decide When Dividends are Paid Out?

The amount of money and how frequently the dividend payout will be depends on what the Board of Directors declares after reviewing the financial statements. Most companies pay out quarterly dividends (every 3 months) to shareholders.

How Do Shareholders Find Out About Dividends?

*Once a dividend is declared, a notice goes out to all current shareholders usually by snail mail or through an online investment account. If you own shares in a company that pays out a dividend, this means you get extra moola in your account that you can either re-invest, spend, or save! *

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Finally, dividends are not guaranteed and are completely dependent on the business performance. That means if the company is losing lots of money, the shareholders likely won’t be seeing dividends anytime soon. Check out this article to see what Warren Buffett considers the ‘Top Ten Dividend Paying Stocks for 2015.’

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