What is a dividend?

What is a dividend?

A dividend represents a distribution of profits from a company to its owners, or shareholders.

Let’s say Company A generates a profit of $1 million in 2017, and has a total of 1 million shares on issue. If the company wanted to distribute all of its profits to shareholders, it could declare a dividend of $1 per share.

Many companies pay dividends in Australia, including Commonwealth Bank of Australia (ASX: CBA), Telstra Corporation Ltd (ASX: TLS) and Sydney Airport Holdings Ltd (ASX: SYD).

However, most companies prefer to retain at least some of their profits to reinvest in the business (thus promoting future growth).

So, let’s say Company B also generates a profit of $1 million in 2017, and has a total of 1 million shares on issue. However, it wants to keep $500,000 to invest in a new project. It could thus decide to distribute the remaining $500,000 to shareholders, declaring a dividend of 50 cents per share instead.

Investing in strong, dividend-paying companies is a great way for investors to build their wealth, over time.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia owns shares of Sydney Airport Holdings Limited and Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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