Dividends: getting paid for holding
Where the cash actually comes from, and why a huge yield is often a warning.
What a dividend is
When a company makes a profit it can reinvest it or hand part of it to shareholders. That handout is a dividend, usually paid once or twice a year, straight into your account.
Yield is the annual dividend divided by the share price. A share at 100 paying 5 has a 5 percent yield.
Why a very high yield is suspicious
Yield rises when the price falls. A yield that suddenly looks spectacular often means the market expects the dividend to be cut, or the business to shrink.
Check whether profit actually covers the payment. A dividend paid out of borrowing is not sustainable.
Reinvesting is the quiet compounding move
Using dividends to buy more shares means the next dividend is bigger, and so on. Over decades this is where a large share of total returns comes from.
Some brokers do this automatically. Ask.
It is taxed
Most countries tax dividend income, sometimes withheld before it reaches you. The rate depends on where the company is and where you live.
The one thing to remember
Dividends are real cash, but a spectacular yield usually means the market is worried.
