What is a dividend?
What is a dividend? (0:57)
Companies generally hope to generate profits. We they do they have a choice as to what to do with the money. They can fund projects to grow the business such as building a new factory or hiring more employees. However, one alternative option, of many, is to return some of the profits to shareholders, this is called a dividend.
A dividend is a cash payment to shareholders of a portion of the profits the business has made. Some businesses don’t pay dividends because they believe they have a lot of internal projects that make sense to invest in. These businesses decide to spend the money on growth rather than give it back to investors. In theory this should make investors better off in the long-run once the profits from those additional projects arrive.
Generally faster growing companies tend to pay little or no dividends as they want to spend on growth. However, slower growing and more mature companies tend to pay dividends. What a particular company choses in terms of dividend policy isn’t always that important, because you can always create your own ‘dividends’ by selling some of the shares, or if you do receive a dividend you can use it to buy more shares in the company that issued the dividend to you.