What is a Dividend?

What is a dividend?  Someone new to investing and hearing about the word, “dividend”, may ask.  Therefore, I thought I would take time, to break down what a dividend actually is, what the benefits are and what it can do for you, as an investor and individual looking to invest.

Finance Sketch Near Laptop Computer

What is a Dividend?

By sheer definition, a dividend can be two things, simultaneously.  A dividend is money paid to a shareholder of a company, whether that be from the net income (profits) or from their reserves (retained earnings/profits).  Similarly, dividend has the word, “divide” within the word.  One could look at a dividend, as dividing the profits among shareholders and to retain profits within the company.   For instance, we will take a look at the company – Johnson & Johnson (JNJ is their ticker symbol) and their recent quarterly financial statement filing from Quarter 1, below:

We can see, above, that the company had net earnings or net income of $4,367, which is actually $4 billion dollars, as this is disclosed in millions.  Based on the number of shares that are outstanding to individuals, when dividing the profits by that number, you are calculation earnings per share or EPS.  Therefore, JNJ earned $1.63 per share of stock outstanding.  How did JNJ “divide” those earnings or profits?  The last line, you can see, they had a dividend given to each share of stock owned, in the amount of $0.84.  JNJ, then, gave a dividend of cash (money) out of their profits to each share holder of stock in the company.  If you owned one share of JNJ stock, you received $0.84.  If you owned 10 shares of JNJ stock, you received $8.40 and so forth.  Therefore, they divided their earnings in two ways.  One was an $0.84 cash dividend and the remaining $0.79 was to keep in reserves or retained earnings.  Make sense?

What is so great about a Dividend?

Now that we understand what a dividend is, so what?  What is so great about a dividend?  Why would you, someone who owns share in a company, care about a dividend?

Healthy: First, a dividend shows (typically) that the company is healthy & profitable.  It becomes very insane when companies are paying a dividend that is greater than their earnings per share, consistently.  We can touch on more of that later.  Therefore, if a company has the ability to pay the dividend, because of earnings, it shows their financial health is “well”.

A Return: Secondly, a dividend payment is a way to return your investment back to you, as a shareholder, in the form of a dividend.  You have invested your money to buy and own a share(s) of a company.  What better way to reward a shareholder, during profitable years, than the form of a cash dividend?

Income Source: This doesn’t come to a shock to those who frequent our blog, as dividends are one of our main sources for financial freedom.  A dividend can be an income source for you.  See our monthly income articles or our portfolio page.  You’ll see the amount of projected income from our investments, at any given time.  A dividend can be a very valid and reliable income source for you.  You can use a dividend payment to pay for your living expenses.  Further, there is preferential tax treatment to dividends, see this article on what $50,000 in dividend payments looks like!

Reinvestment: When you receive a dividend, and depending on which brokerage you use, you have the ability to automatically reinvestment RIGHT back into the SAME company who paid you, thus, increasing your shares.  When doing this, this will ultimately (should, at least) increase your income going forward.  The other option you have is to build up cash from dividends and find a new investment.  I currently have automatic reinvestment on, but that is based on personal preference.

Now, That’s a Dividend!

I hope that helps answer the question, “What is a Dividend?”, with full details.  Who is ready to invest their money into a share of a company, that produces a dividend?  Look at those benefits above, it just doesn’t get any better than that.  Please do not hesitate to leave a question in the comments below, send us an e-mail or find us on twitter.  We are looking forward to what you may have to say and hope we talk soon!  Good luck and happy investing to all!

-Lanny

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17 thoughts on “What is a Dividend?

    • Tom –

      Haha, pumped that you thought it was worthwhile. Had a few LONG discussions with not just Bert, but others, and it was time to get some teaching lessons out there, as we talk about so much and sometimes may miss out on boiling it down to the nuts/bolts. Thanks again Tom for the stop by.

      -Lanny

  1. It’s always good to both be reminded of the basics and to remember that not everyone who read blogs is an expert. Sometimes it helps to start with the fundamentals and go from there. Excellent article Lanny.

    • DP –

      Exactly, we realized that not everyone has invested 10 years and for some – it could be there first 10 minutes of searching on the web about investing, dividends, etc.. Very pumped to write and even more excited about the reaction from the community!

      -Lanny

  2. This article couldn’t have come at a better time as we just opened a trading account for my 20 year old son. I just sent the link to this article to him. Thank you.

    • Lou –

      Your comment is the exact reason why we decided to write this! It was a realization that – wow, we need to get back to the fundamentals and teach that. I am beyond excited that you shared this article with your son. Also – congrats on assisting him with his brokerage account, let the dividends roll : )

      -Lanny

  3. “What is a dividend?”

    “Both the currency and purpose of diplomacy!” is what popped into my head reading the title in my feed this morning. I knew this would be good post after hanging out randomly in Milwaukee with old friends from Cleveland…we actually talked about your site 🙂

    Also, thanks for including your prior $50k example – that was a great read to share. – Mike

    • Mike –

      HAHA! I think that’s a perfect way to think of it. No fricken way… do you remember what part from Cleveland?? You’re from Chicago right? Being from Cleveland, they have to be pretty cool…

      And of course – you sharing that article is what continues to fuel the writing and is the main reason to keep going. Truly means a lot, thank you Mike!

      -Lanny

  4. in terms of earning from dividend does that mean buying a lot of stocks from company that provides or earn a lot money and payout healthy dividend to shareholders ? please advise

  5. I think unless you’re at a certain point in account size (e.g. $30+), it’s very hard to justify the slow and steady returns and income that dividends offer. You really need to be scaling high in position size to cover the opportunity cost of going for shorter term, higher risk/profit trades that can benefit a small account and beginner trader.

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