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What is a Dividend?

A dividend is a portion of earnings given to a company’s shareholders (people who have bought company stock). The percentage is determined by the board of the directors, and the payout is dependent on the company’s fiscal calendar. For example, a company might pay 3% dividends each quarter. If you have 100 shares, worth $500, you'll earn $60 over the course of the year. Some companies, usually startups or younger companies, don’t issue dividends to shareholders. Instead, they keep the profits to support growth, which in turn, generates wealth for the investors because stock is often more valuable as a company grows.

Dividends are usually distributed as cash. However, some smart investors use the dividend profit to reinvest in the company. They use their dividends to gain more shares, increasing the amount they’ll get at the next time of payment. Most shareholders have receive dividends from their investments in retirement plans, such as a 401K, and mutual funds. A mutual fund is a huge pool of stocks, so whenever dividends are paid, all the shareholders of the fund will share the sum of the profits. 

Last Updated: July 07, 2017

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