Lesson 5 of 5 · 6 min read
Dividends explained
Some companies share a piece of their profit with shareholders. That's called a dividend.
What is a dividend?
A dividend is a portion of the profit that a company pays out to shareholders, usually quarterly or annually. If you own 100 shares with a €0.50 dividend per share, you receive €50. Not every company pays a dividend — growth companies often prefer to reinvest their profit.
Dividend yield
The dividend yield = annual dividend ÷ price. A €40 share that pays a €2 dividend has a 5% dividend yield. Be careful: an extremely high dividend yield can be a warning that the price has crashed or the dividend is unsustainable.
Reinvesting
You can put received dividends back in to buy more shares. That greatly strengthens the compounding effect: your dividend buys shares that themselves pay dividends again. Many ETFs do this automatically ('accumulating').
Remember this
- A dividend is a portion of the profit that a company pays out to shareholders.
- Not every company pays out; growth companies often prefer to reinvest their profit.
- Dividend yield = annual dividend ÷ price; extremely high can be a warning.
- Reinvesting dividends strengthens the compounding effect; accumulating ETFs do this automatically.
There is a quiz for this lesson
3 questions that check whether it stuck. They live in the app, because a quiz nobody grades teaches nothing.
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