Dividends are the payment of acorporation's profits to itsshareholders. Payment of dividends are not mandatory; rather, theboard of directorsmay use its discretion to decide whether to invest the company's profits back into the company pay them out in dividends.
Despite the fact that dividends are not mandatory, many companies issue dividends on a regular basis, typically quarterly. Dividends are typically issued as either flat number ($2) or as a percentage of stock price.
Dividends are paid out per share, therefore, the more shares a party owns in a given company, the more they will receive when that company issues dividends. For example, if company A issues dividends of $1 per share, a person who owns 100 shares will receive $100.
Additionally, dividends provide a useful tool to estimate the value of a stock through what’s known as the dividend discount model. Under this model, a stock is worth the present value of all future dividends.
[Last updated in September of 2022 by the Wex Definitions Team]
