What is a dividend, and what is dividend yield?
Short answer
A dividend is a share of a company’s profit paid to its shareholders, usually in cash per share. Dividend yield is the annual dividend per share divided by the current share price, shown as a percentage.
Dividends
A company’s board decides whether to pay a dividend and how much. It is not guaranteed and can be cut or stopped. Dividends are paid per share, so an investor with 100 shares receives 100 times the dividend per share. Some companies prefer to reinvest profit or buy back shares instead.
The key dates
The declaration date is when the board announces the dividend. The record date is the day the company checks who is on its register. The ex-dividend date is the first day shares trade without the right to the upcoming dividend; to receive it, you must own the shares before the ex-date. The payment date is when the money is sent. The share price typically adjusts down by about the dividend amount on the ex-date.
Dividend yield and payout ratio
Illustrative arithmetic: a share priced at 800 that pays 20 in dividends over a year has a yield of 20 / 800 = 2.5%.
A very high yield can come from a falling share price rather than a generous payout, and may signal that the dividend is at risk. The payout ratio shows what portion of profit is paid out; a ratio above 100% means the company paid more than it earned.
Dividend yield (%) = annual dividend per share / share price x 100
Payout ratio (%) = dividends / net income x 100