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Dividend Definition and Quiz

Dividends represent yield, like interest on a bond. However, unlike bonds, a company isn't obligated to pay dividends.
  1. Define - Define dividend for stock investments.
  2. Context - Use dividend in a sentence.
  3. Quiz - Test yourself.
face pic by Paul Alan Davis, CFA
Updated: February 17, 2021
During material price declines the sustainability of a dividend comes into question. Learn more below.

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Dividends for stock investing


Dividend is a recurring payment from a company in the form of cash paid directly to the shareholder's brokerage account. In most cases, dividends occur quarterly but in some cases companies pay annually. There are two types of dividends: regular and special. Regular dividends are consistent and are rarely modified except for small annual increases as set by the Board of Directors. Special dividends are infrequent (ie, less than 1% of companies annually) and occur when a company has extra cash. Some pricing services may record a spin-off as a special dividend.

Synonym: Yield

For context, it's difficult to know whether a company can afford to pay a dividend, particularly if its profitability declines. As a result, it is important for the analyst to review a company's payout ratio, or retention ratio, to see if a dividend could be cut. A company's Board of Directors is reluctant to reduce dividends because stock prices often drop substantially following this news.

During the Great Financial Crisis many banks reduced their dividends and in 2020, airlines and retailers cut payout ratios in response to declines in profitability related to the Covid-19 pandemic and competitive forces.

In a Sentence

Guy:  Should we assume dividends of 8% are not sustainable?
Rex:  For REITs I'm not sure that's a good assumption.


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A stock with a dividend yield of 5% and a dividend of $1.50 annually has a price of ___. | $7.50, $20, $30 or $45?

$30. Price = Dividend / Yield

A company cannot pay dividends in excess of earnings. | True or False?

False. Over short periods of time, like 1 to 2 years, earnings can exceed dividends.

Questions or Comments?

Still unclear on the concept of a dividend? Check out the Quant 101 series where we take a deep dive into financial modeling in Excel.

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cash dividend
special dividend
regular dividend
equity dividend
stock yield
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investment dividend
how do dividends work
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investment yield
dividend payout ratio
recurring revenue

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