DIVIDENDS & YIELD
Plain English
Dividends are cash payments companies make to shareholders, usually quarterly. It's like getting a rent check for owning part of a business. Dividend Yield tells you what percentage of the stock price you receive in annual dividends.
Going deeper
Dividends are distributions of a company's profits to shareholders. Dividend Yield = Annual Dividend / Stock Price. A stock paying $2.00 per year at a $50 price has a 4% yield. The ex-dividend date is critical — you must own the stock before this date to receive the dividend. Dividend Aristocrats are S&P 500 companies that have increased dividends for 25+ consecutive years. Dividend growth rate matters as much as current yield. Payout Ratio (dividends / earnings) indicates sustainability — ratios above 80% may signal the dividend is at risk. Qualified dividends are taxed at lower capital gains rates.
Examples
Dividend Income
You own 500 shares of a stock paying $0.50 quarterly dividend ($2.00/year). You receive $250 per quarter ($1,000/year) in passive income. If you reinvest those dividends (DRIP), you buy more shares automatically.
Dividend Trap
A stock yields 12% — sounds amazing. But the company is losing money and the payout ratio is 200% (paying more than it earns). The stock price is falling because investors expect a dividend cut. This is a classic 'yield trap.'