Understanding dividends

A dividendDividend Part of a company’s profits that it pays to shareholders in proportion to the total number of shares held. The Board of Directors sets the amount. For common shares, the amount varies. It may skip dividends if business is poor or the directors invest money in things like new equipment or buildings.+ read full definition is a payment to shareholders from the company. The money comes from the company’s profitsProfits A financial gain for a person or company. Equals the money left over after you subtract your costs from the money you made.+ read full definition, and the amount you receive typically depends on the number of shares owned, the shareShare A piece of ownership in a company. A share does not give you direct control over the company’s daily operations. But it does let you get a share of profits if the company pays dividends.+ read full definition class (type of share), and when the shares were owned.

A company’s board of directors decides whether to declare a dividend which may depend on many factors, including the financial strength of the company. It can be a one-time event or paid on a monthly, quarterly or annual basis. Some companies may choose not to declare dividends.

Dividends are not guaranteed. A company may decide to delay, reduce, or eliminate dividends at any time.

Another type of dividend is stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition dividends. This article discusses cash dividends since it is the most common type of dividend for publicly traded companies.

Common and preferred shares may receive dividends. However, preferred shareholders usually receive dividends on a fixed schedule and benefit from additional rights, such as the right to receive dividends before common shareholders.

3 things about dividend investing

1. Income stream

Dividend investing generates passive income. You receive regular payments which you can use for daily expenses or to reinvest to buy more shares.

2. Tax

Depending on your taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition situation, you may pay less tax on dividend income compared to income from interest or capital gains. Federal and provincial tax credits may also lower the amount subject to tax.

3. Dividend yield

Dividend yieldDividend yield A ratio that shows annual dividend rate expressed as a percentage of the current market price of a stock. To calculate, you divide the total dividends you get in a year by the price of each share that you own.+ read full definition is a ratio that is calculated by dividing the total annual dividend by the current market price of the stock.

The dividend yieldYield Your yearly return on an investment. It’s often stated as a percentage, such as 5%. With stocks, yield can be your yearly income from dividends. With bonds, it’s the interest you get.+ read full definition is useful when comparing the potential dividend returns of different stocks. While a high dividend yield could be an attractive investing option, it is important to remember that there are many other factors to consider like the company’s financial performance or how it compares to others in the industry.

Dividend risks

Dividends can be delayed, reduced or eliminated at any time. If a company experiences financial difficulty or decides to reinvest profits back into its operations, dividends could be impacted.

Stocks, like all investments, come with risks. Large companies with a strong track record of offering dividends can still be affected by global events, industry-specific news or stock marketStock market The collection of markets and exchanges where stocks, bonds and other securities are issued or traded.+ read full definition volatilityVolatility The rate at which the price of a security increases or decreases for a given set of returns. A stock price that changes quickly and by a lot is more volatile. Volatility can be measured using standard deviation and beta.+ read full definition.