What is a Dividend? - Stocks Made Simple

Welcome to our second edition of Stocks Made Simple, where we break down the stock market for you into the simplest of terms! This week, we will focus on a passive source of income that comes with holding a stock: the dividend.

A dividend is a portion of a company’s earnings that is distributed to each shareholder. Since, as a shareholder, you are part owner of the company, you are entitled to a portion of the earnings that the company produces. These dividends are given out on a “per share” basis. For example, if I own 3 shares of Microsoft, and they announce a $.25 per share dividend, I will receive $.75 in my brokerage account once the dividend is distributed.?

It is important to know that a company is unlikely to pay out all of their earnings in the form of dividends. A company may choose to retain their earnings and use the money to reinvest in themselves. The portion of earnings that a company chooses not to give out as a dividend is called the “retention ratio”. Smaller companies tend to have much higher retention ratios, meaning less dividends are given out and a high percentage is reinvested into the company, because these firms are more focused on growth. Large, well established companies are more likely to have a lower retention ratio.

Dividends are often in small amounts per share, but if you choose to hold a stock for a long time and/or put your dividend proceeds towards buying more shares, the effect can compound. Research a firm’s retention ratio and dividend payout history before purchasing in order to get a better idea as to how much you can expect to receive over time.

Dividends are just one benefit of being invested in the stock market. Keep up with our Stocks Made Simple series to learn more!

Written by:

Jerod Osika

May 3, 2023

Binghamton University

Financial Literacy for the Youth