Dividends are cash payments some companies make to shareholders out of their profits, usually every quarter in the US. A portfolio of dividend-paying stocks can create a growing stream of passive income, and reinvesting those dividends can significantly boost long-term returns.
How dividends work
When a company earns more than it needs to run and grow the business, it can return some of that cash to shareholders. Mature, profitable companies in industries such as consumer staples, utilities, health care, energy and financials are the most common dividend payers. Fast-growing companies often pay little or nothing, preferring to reinvest. To receive a dividend, you need to own the shares before the ex-dividend date; see how dividends are paid.
Key terms
- Dividend yield: annual dividends per share ÷ share price. A $60 stock paying $1.80 a year yields 3%.
- Payout ratio: the share of earnings paid out as dividends. Very high payout ratios can leave little room for growth or for bad years. See dividend payout ratio.
- Dividend growth: how quickly the company raises its payment. Some established companies have raised their dividends every year for decades.
- Yield on cost: your annual dividend ÷ the price you originally paid. As the dividend grows, your yield on cost rises.
Yield isn't everything
An unusually high yield can be a warning sign. Yield rises when the share price falls, and prices often fall because investors expect a dividend cut. Before buying a high yielder, check:
- Whether earnings and free cash flow comfortably cover the dividend.
- The company's debt load. See the debt-to-equity ratio.
- Its dividend history: steady growth through past recessions is a good sign.
- Whether the business itself is growing or shrinking.
Dividend growth vs. high yield
Dividend investors often choose between two styles. High-yield investing targets stocks with large current payouts for maximum income today. Dividend growth investing targets companies with lower starting yields but fast-rising dividends, which can produce more income over time and often better total returns. Many portfolios mix both.
Reinvesting dividends
A dividend reinvestment plan (DRIP) automatically uses each payment to buy more shares, which then earn their own dividends. Over long periods this compounding can significantly increase both your income and your total return. See how compound interest grows your investments and model it with the dividend calculator.
How to build a dividend portfolio
- Diversify across sectors so a downturn in one industry doesn't hit all your income at once.
- Favor quality: steady earnings, reasonable payout ratios and manageable debt.
- Consider dividend ETFs for instant diversification. See what is an ETF.
- Look at REITs for higher income, keeping in mind their different tax treatment. See what is a REIT.
- Mind taxes: qualified dividends get lower rates, and tax-advantaged accounts avoid annual tax. See capital gains tax on stocks.
Find dividend stocks
Use the dividend stock screener to filter by dividend yield, market cap and sector, then review each company's financials on its stock page and its score in AI Insights. For a complete research routine, see how to analyze a stock.
This article is educational and not investment advice.
Frequently asked questions
How often are dividends paid?
Most US companies pay dividends quarterly. Some pay monthly, and many international companies pay twice a year or annually.
What is a good dividend yield?
It depends on the company and sector. Unusually high yields can be a warning sign that the market expects a dividend cut, so check the payout ratio and free cash flow rather than chasing the highest yield.
Are dividends taxed?
In a regular US brokerage account, yes. Qualified dividends are generally taxed at the lower long-term capital gains rates, while ordinary dividends are taxed as regular income. Dividends inside IRAs and 401(k)s aren't taxed each year.
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