Dividends
Cash paid out of profits. Pleasant to receive, widely misunderstood, and not free money — the share price adjusts.
A dividend is a payment a company makes to its shareholders out of profits. If you own a hundred shares and the company declares a dividend of fifty cents a share, fifty dollars arrives in your account.
The part that surprises people
Cash leaving the company makes the company worth less by exactly the amount that left. On the morning a share trades without the right to the upcoming dividend, its price drops by approximately that amount. You have not gained anything at the moment of payment — you have moved value from the share price into your cash.
That is not an argument against dividends. It is an argument against thinking of them as income that appears from nowhere. They are a decision about where profits sit: inside the business or in your account.
Yield, and why a big one can be bad news
Dividend yield is the annual dividend divided by the share price. As arithmetic, a yield can rise for two completely different reasons: the company raised its dividend, or the share price fell.
A yield that looks unusually generous frequently reflects a price that has collapsed because other investors doubt the dividend will survive. Screening for the highest yields without asking why they are high selects for exactly the companies about to cut.
What a dividend tells you about a company
- Maturity. Companies pay out when they cannot reinvest profits at an attractive return. Fast-growing businesses usually do not pay dividends, and that is rational.
- Discipline. A dividend is hard to fake — it requires cash.
- Commitment. Cutting one is read as a signal of distress, which means boards defend dividends longer than they arguably should.
Buybacks, briefly
A company can return cash by buying its own shares instead. The effect is similar — cash leaves, each remaining share owns a slightly larger slice — but it is not paid to you directly, and it is easier to stop quietly.