RiskPicksWhat is a Dividend?
A dividend is a cash payment a company distributes to its shareholders, typically on a quarterly basis. It represents a share of the company's profits returned directly to the people who own the stock. Not all companies pay dividends. Growth companies often reinvest profits instead.
Key dates to know
- Declaration date: when the company announces the dividend amount and payment date
- Ex-dividend date: the cutoff date. You must own the stock before this date to receive the dividend. On this date, the stock price typically drops by roughly the dividend amount
- Record date: the date the company checks its records to confirm who gets paid (usually one business day after ex-date)
- Payment date: when the cash actually appears in your brokerage account
Why traders care about dividends
- Ex-dividend gap downs: stocks drop by roughly the dividend amount on the ex-date, which can create short term trading opportunities
- Dividend capture: a strategy where traders buy just before the ex-date and sell shortly after to collect the payout
- Income investing: longer term investors use dividends as a steady income stream
- Signal of health: companies that consistently pay and raise dividends are generally profitable and stable
Dividend yield
Dividend yield is the annual dividend payment divided by the stock price, expressed as a percentage. A stock paying per year in dividends with a price of has a 4% yield. See the Yield glossary entry for more detail.
Day traders rarely hold positions long enough to collect dividends, but the ex-dividend date price drop is a factor to be aware of when planning overnight holds.