Glossary
Dividend
A dividend is a payment a company makes to its shareholders, usually in cash and usually quarterly, distributing part of its profits.
Not all companies pay them — many growth companies reinvest profits instead. Fund investors receive dividends passed through from the fund's underlying holdings and can typically reinvest them automatically. U.S. tax law treats "qualified" dividends at long-term capital gains rates federally; others are taxed as ordinary income.
Why it matters in practice
Reinvested dividends have historically accounted for a large share of the stock market's total long-term return, which makes automatic reinvestment a quiet compounding engine. A caution: a very high dividend yield is sometimes a distress signal — the market marking down the price of a company whose payout may not last — so yield alone is not a quality screen.
Related terms: Stock · Yield · Compound Interest · Capital Gain · Blue Chip