Some companies choose to pay back their shareholders a portion of their profits - this is known as a dividend.
It can be paid back in the form of cash or additional stock. As long as the shareholder owned the stock before the ex-dividend date, they will qualify for it.
A company is not required to pay out dividends - the choice is driven by shareholders preferences for cash redistribution, and often driven by tax considerations.
When a company announces the start/increase in dividends, this usually results in an increase in a stock’s price, as the stock is now more valuable.
When the stock pays the dividend, its value falls by a similar amount (albeit then the price can fluctuate). The “ex-dividend” date is the last date by which owning a stock gives right to the next dividend. Usually the dividend payment takes place a few days later.
What is the dividend yield?
The dividend yield is expressed as a percentage and calculated by dividing the dollar value of dividends paid per share in a year by the dollar value of one share. The dividend yield is the annual dividend per share over the stock’s price.
Higher dividend yields do not always indicate attractive investment opportunities because the dividend yield of a stock may be elevated as the result of a declining stock price. On the other hand, lower dividend yields do not always indicate a bearish outlook for the stock because the dividend yield of a stock may be low as the result of a rising stock price.