Companies can do two things with profits. They can reinvest the money in the business, or they can hand some of it to shareholders. That handout is a dividend, usually paid in cash on a regular schedule. A company might pay quarterly, semi-annually, or annually. The board of directors decides the amount, and it can raise, cut, or suspend it at any time.

Dividends appeal to investors who want income rather than rapid price appreciation. Retirees often hold dividend-paying stocks for steady cash flow. Utilities, consumer staples firms, and real estate investment trusts are classic dividend payers because their businesses are stable and generate consistent cash. Tech companies often pay nothing, preferring to reinvest for growth.

A high dividend yield is not always a good sign. Yield is the annual dividend divided by the share price. If the price falls because the company is in trouble, the yield looks tempting but the dividend may soon be cut. Investors who chase yield without checking the fundamentals often get burned.

Dividend basics

• Declared by the board of directors
• Paid per share, often quarterly
• Yield equals annual dividend divided by share price
• Can be cut or suspended in hard times
• Taxed differently from capital gains in many countries