What is a Dividend?

Dividends are a way companies share profits with their shareholders. If you own stock in a company, a dividend is like a thank-you payment for investing. Picture a fruit tree sharing its apples with you each season. These payments can provide steady income, making dividends a popular choice for people exploring passive income ideas. Platforms like Robinhood, Vanguard, Schwab, and M1 Finance make it easy to start investing in dividend-paying stocks, offering tools tailored for beginners and seasoned investors alike.

If you're new to investing or curious about growing your money, understanding dividends can be a solid part of your plans and goals.

So, What is a Dividend?

In more formal terms than the “thank-you” analogy, a dividend is a portion of a company’s earnings paid to its shareholders. When a company makes a profit, it can reinvest the money, pay down debt, or distribute some as dividends. Most dividends are cash payments sent to your brokerage account, though some come as extra shares of stock, which is explained later in this article. You can explore these payments through platforms like Vanguard or Schwab, which offer robust tools for tracking dividend income.

For example, Coca-Cola has a long history of paying dividends. Historically, it offers a dividend yield—how much you earn relative to the stock price—of about 2-3%. If you own $1,000 worth of Coca-Cola stock, you might receive $20-$30 annually in dividends. These payments aren’t always guaranteed, but stable companies often prioritize them to keep shareholders happy.

Side note: Don’t let these numbers scare you in the wrong direction. It is possible to do far better than $20-$30 annually for every $1,000 dollars you may have invested in dividend stocks, just keep reading.

Dividends signal financial health. Companies in industries like utilities or consumer goods, which are typically profitable, often pay consistent dividends. However, younger firms, like many tech startups, may skip dividends to reinvest profits for growth.

If you're a frequent visitor to everdend.com, it will be inferred (if not worse) as to how much of a fan of Warren Buffet I am. Since I've used Coca-Cola as an example, I want to add that Warren Buffett's Berkshire Hathaway received approximately $776 million in dividends from Coca-Cola in 2024. Granted that's from a 25 billion dollar investment, but the fact remains. In fact, a part of Berkshire Hathaway's ongoing and longstanding strategy has used dividend-paying holdings.

If you're going to follow a few leaders in the investing world, it's my opinion that Warren Buffet and Berkshire Hathaway are a great place to start or restart.

A Dividend Scenario

Let’s say you’re a 40-year-old starting to invest for retirement and you put $5,000 into a company like Coca-Cola through a platform like M1 Finance, which historically pays a 2.5% dividend yield. Each year, you earn $125 in dividends, paid quarterly ($31.25 every three months).

You could…

1. Reinvest

   
   Reinvest these payments by buying more shares (this can be done automatically). Over 10 years, assuming stable stock prices and dividends, your investment grows through compounding.

2. Withdraw

   
   Withdraw those quarterly payments and pay a Netflix bill every three months. In this case, it's as if you get "free" Netflix for one third of the year. I know that sounds completely ridiculous (because it is), but this is a silly example for illustration purposes.

3. Reinvest/Withdraw Hybrid

   
   Use a hybrid of reinvesting your dividend earnings and using the rest for cash-flow.

At a fundamental level, this is how dividends can work for you, offering flexibility for income and/or growth.

But This Takes Forever, Right?

No.

Before I go any further, I'd like to address one of the biggest reasons why people shy away from dividends: It takes too much time and money.

Years ago, when I began paying more attention to dividends as a passive income source, I thought the same thing: If I had a million dollars, this would be perfect. From my earlier Berkshire Hathaway example, a year with an income of over three quarters of a billion dollars from one single dividend payer (among many in their holdings) is great, I just haven’t worked out the 25 billion investment part yet.

Without getting too far beyond the scope of this “basic” article, I'll share some highlights of what I learned and how I shaped my personal portfolio over the years…

• ✓ I personally don't invest in many dividend payers that don't offer an annual yield of at least 8%+.
• ✓ While I do have quarterly (“slow”) dividend payers, I chose them in a way that their payout schedule means I get weekly dividends. This is for another discussion, but yes, weekly payouts are possible with the “slow” quarterly payers.
• ✓ I prefer monthly payers. In addition to practical matters, the psychological effect of frequent payments to your account should not be underestimated. Even if you’re just starting out with $25 in a Robinhood account to see how things work, it’s nice when you see the alert that you’ve received a dividend payment (a few cents for an account that small but pennies make dollars and you're learning).
• ✓ I currently have weekly payers. Most of these are relatively new (this decade) but I’m testing a few of them. Weekly dividend payers are well beyond the scope of this article due to their mechanics' special considerations, I’m just reinforcing the fact that dividend cash-flow isn’t at all what it used to be.

I added this section after I realized that while using Coca-Cola might be a good and recognizable example with the bonus tie-in for a mention of Berkshire Hathaway, I simultaneously may have reinforced the “dividends are slow and for the rich” reputation that dividends have. That reputation isn’t warranted; dividend-paying stocks or funds can be a part of anyone’s plan.

Types of Dividends

Companies pay dividends in different forms. Here are the main types:

• Cash Dividends

  The most common, paid as money to your account. For example, a company might pay $0.50 per share quarterly. This type of dividend is our focus here at Everdend.

• Stock Dividends

  You receive additional shares instead of cash, increasing your ownership without immediate income.

• Special Dividends

  One-time payments, often after a big profit or asset sale. These are less predictable and are nice when they happen (surprise bonus), but I have never counted on them or made them any part of a plan.

Cash dividends are what most investors think of, offering straightforward income or reinvestment options through platforms like Schwab or M1 Finance.

How Dividends Are Paid

Dividends follow a schedule: annually (yes, yearly payers exist but they are a hard no for me personally), quarterly, monthly, or as I’ve mentioned, weekly. Regardless of the timing, the process involves key dates:

• Declaration Date

  The company announces the dividend amount and payment date.

• Ex-Dividend Date

  You must own the stock before this date to get the next dividend. Buying on or after this date means you miss it.

• Payment Date

  The dividend arrives in your account. For example, if a company pays a $0.25 quarterly dividend and you own 100 shares, you’d receive $25 on the payment date, provided you held the stock before the ex-dividend date. These payments can add up, especially with multiple dividend-paying stocks.

Benefits of Dividends

Dividends offer several advantages for those exploring passive income:

1. Steady Income

   
   Dividends provide regular cash, useful for bills or extra savings. There are retirees that rely on dividends for living expenses and then there are not-even-close-to-retirees that do this for cash-flow.

2. Compounding Growth

   
   Reinvesting dividends buys more shares, growing your investment over time.

3. Stability

   
   There are many dividend-paying companies that are financially strong regardless of domestic or global economic conditions, offering a cushion during market dips. These stocks tend to be less volatile.
   
   Sticking with the Coca-Cola example, it was first listed on the NYSE in 1919 and it’s survived The Great Depression, World War II, several crashes including 1987’s Black Monday, The Great Recession (2007-2009), and anything else that the world has thrown at it.
   
   Coca-Cola started paying dividends in 1920 and while there have been adjustments along the way, it has never stopped its dividend.

Risks to Know

Dividends have risks to consider before investing:

• Not Guaranteed

  Companies can cut or stop dividends if profits fall. Economic downturns often lead to reduced or paused payouts.

• Company Risk

  A dividend cut may signal financial trouble, potentially lowering the stock price. Researching and checking in on a company’s health is always important.

• Tax Implications

  Dividends are often taxable as income, depending on your situation. A tax professional can clarify how this affects you.

I’m not only the owner of Everdend and its editor in chief, I also contribute heavily with the content on this site and I don’t allow anything that comes close to discussing taxes. “Tax Implications” is the extent of our writing on the matter. Too many variables, too many regulations, but it’s income, so of course there are tax considerations.

Researching and learning about dividends means weighing these risks against the potential for income and growth.

Frequently Asked Questions

Let's recap where we are with some short answers...

Key Takeaways

Dividends are a powerful way to explore passive income and/or long-term growth. There are numerous companies (as of 2025, there are more than 3,000+ dividend payers listed on the NYSE/Nasdaq) that share profits with shareholders, offering regular payments that can be spent and/or reinvested. With available benefits like steady income and stability, dividends appeal to beginners and seasoned investors.

However, risks like dividend cuts mean you should research carefully. Apart from things like oxygen, food, and water, there are few things in life that are a perfect fit for everyone. Understanding dividends—how they’re paid, their types, and trade-offs—can help you decide if they fit your financial goals. Platforms like Robinhood, Vanguard, Schwab, and M1 Finance provide accessible ways to start exploring dividend investing.

This has hopefully been a good starting point or refresher for you regarding the absolute basics of dividends. From here, and as you can read on this site, the possibilities of potentially fitting dividends into your plans are many and varied.