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.
