Dividend
A cash payment from a company to its shareholders out of profits.
A company with profits can reinvest them or distribute them. Mature businesses with limited reinvestment opportunities tend to distribute, which is why utilities and banks pay dividends while companies still expanding usually do not. The choice describes where a business sits in its life, not how good it is.
Yield is the annual dividend divided by the share price. Because the price sits in the denominator, a yield can rise for the worst possible reason: the payment held steady while the stock fell. Unusually high yields are worth checking against the payout ratio before treating them as income.
A dividend reinvestment plan routes each payment straight back into additional shares. Reinvested dividends have accounted for a substantial share of long-run US equity total returns, on the order of 40% since 1930 by Hartford Funds' accounting, which is why price charts alone understate what holding actually returned.
Worked through
Reinvestment on its own
A 3% yield paid quarterly and reinvested, holding the share price flat so only the reinvestment shows.
- Starting balance
- $10,000
- Annual yield
- 3%
- Paid quarterly
- $75
- After 10 years
- $13,483
A 34.8% gain with no price appreciation at all. Every dollar of it came from reinvestment.
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