What are dividends? Helping kids understand investment.

By The Loved Investing Team December 29, 2018

What are dividends? Helping kids understand investment.

What are dividends?

Dividends are a really cool thing to receive, because they're a reward for having invested in a company that makes a profit.

A dividend is a company's distribution of its profits to its shareholders.

As a shareholder you own a proportion of a company and the more dividends you receive, the greater your return on that investment. The value of dividends you receive will depend on the number of units of stock in the company you own. The more units of stock you own, the more dividends you will potentially earn from that company.

Companies do not have to pay dividends, they have a choice. Companies that make a profit may choose to pay those profits directly to shareholders as dividends, to reinvest the profits to make future profits, or do a combination of the two.

As a shareholder, you will normally receive this dividend in cash. But you may decide to reinvest those dividends back into the investment to make the most of compound growth.

A useful term to know is the dividend yield which is the percentage dividend you could expect to receive relative to the company's current share price. Using the dividend yield you are able to directly compare the dividend earning potential of various companies.

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