What dividends are in plain words: how to get them and can you live on them
Dividends are the part of a company's profit that it hands out to shareholders. Buy a share and you get your cut for as long as you hold it.
- Dividends are the part of a company's profit a shareholder receives.
- Look at reliability rather than size: how many years they have paid and what share of profit goes out.
- To live on dividends you need capital of 25–33 times annual expenses.
What they are
A company earns a profit. Part it keeps for development, and part it may hand to shareholders — those are dividends. The amount is set per share: if the dividend is $2 and you hold 50 shares, you receive $100.
A company is not obliged to pay dividends. Young fast-growing companies usually pay nothing: reinvesting profit in growth serves them better. Mature companies with stable profit pay for years.
How to get them
- Buy the share before the cut-off date. The company announces the day on which the list of recipients is drawn up. Buy later and this dividend goes to the previous owner.
- Wait for the payout. The money arrives in your brokerage account on its own, usually two to four weeks after the cut-off.
US companies most often pay four times a year. On the cut-off day the share price usually drops by about the dividend amount: buying the day before “for the payout” and selling right away does not work.
Dividend yield
To compare companies, look at the percentage rather than the amount:
Yield = dividends per year ÷ share price.
A share costs $100 and pays $3 a year — a 3% yield. For large US companies the usual yield is 1 to 4%.
How to pick a dividend stock
- How many years they have paid and raised. Ten or more years of rising payouts point to a sturdy business.
- What share of profit they give away. If a company pays out more than 80% of profit, there is no buffer for a bad year.
- Whether profit itself grows. A dividend cannot outgrow the business for long.
- Debt. With heavy debt, in a hard year banks are paid first and shareholders second.
Tax
The US withholds tax on dividends of US companies before the money arrives: 30%, or usually 15% if your country has a tax treaty with the US and you signed form W-8BEN. The rest depends on your country's rules. Details are in the investor taxes guide.
Can you live on dividends
You can, but it takes a lot of capital. The formula is simple:
Capital = annual expenses ÷ dividend yield.
| Expenses a month | At a 3% yield | At a 4% yield |
|---|---|---|
| $1,000 | $400,000 | $300,000 |
| $2,000 | $800,000 | $600,000 |
| $3,000 | $1,200,000 | $900,000 |
The figures are before tax. And dividends are not guaranteed: in a crisis they are cut or cancelled. So living on the payouts of one or two companies is risky — you need a set of dozens, or a dividend fund.
Build a portfolio — the site shows how much it pays in dividends and in which months.
My portfolio's dividends →A ready list: companies that have raised their dividend ten or more years in a row.
Lists in the Analyst →This article is educational and is not investment or tax advice. Dividends are not guaranteed; past payouts do not promise future ones.