Dividend
How a company passes part of its profit to its shareholders, what the dividend yield tells you, and why a dividend isn't free money on top of the share price.
Key idea
A dividend is the part of its profit a company pays out to its shareholders in cash. The rest stays in the company to fund its growth. A dividend isn't extra money on top of the share price: when the shares start trading without it, the price usually falls by about the amount paid out.
What it is
A dividend is the part of its profit a company pays out to its shareholders, in cash, for each share they own. The rest of the profit stays in the company, to invest in its growth or to pay down debt. Not every company pays one: a young company that needs all its money to grow may pay nothing at all.
From profit to your account
Say a company earns CHF 5.00 per share in a year, keeps CHF 3.00 of it and pays out CHF 2.00. You own 100 shares:
Profit
CHF 5.00
per share, for the year
- and
Kept for growth
CHF 3.00
per share
Paid as dividend
CHF 2.00
per share
Your 100 shares
CHF 200.00
before withholding tax
- or
Spend it
as cash in your account
Reinvest it
in more shares, which pay dividends too
The company pays out 40% of its profit, its payout ratio, and keeps 60%. Your 100 shares bring you CHF 200.00. If a share costs CHF 80, your 100 shares are worth CHF 8,000, and the dividend yield, the yearly dividend divided by the share price, is 2.5%. You can take the money as cash, or reinvest it in more shares, which then pay dividends of their own.
The honest caveat
A dividend isn't free money on top of your shares. On the day the shares start trading without the right to the dividend, the price usually falls by about the amount paid: the cash simply moves from the company's account to yours. What counts is the total return, the change in the price and the dividends together.
Dividends aren't guaranteed either. A company can cut or cancel them in a bad year, and a very high dividend yield is often a warning sign rather than a bargain: the yield goes up when the price goes down.
Swiss note
Swiss dividends arrive with 35% withholding tax deducted: of the CHF 200.00, CHF 70.00 goes to the tax office and CHF 130.00 to you, and you get the CHF 70.00 back by declaring the shares and the dividend in your tax return. Dividends count as income, while price gains on shares you hold privately are generally tax-free. One exception: a payout from a company's capital contribution reserves is free of withholding tax and of federal income tax, with an extra condition for listed companies.
Key takeaways
- —A dividend is the part of the profit a company pays out; the rest stays in the company.
- —The dividend yield is the yearly dividend divided by the share price: CHF 2 on CHF 80 is 2.5%.
- —When the shares start trading without the dividend, the price usually falls by about the amount paid.
- —Swiss dividends arrive with 35% withholding tax deducted, which you get back through your tax return.
Related concepts
Stock
Own a slice of a company and share in the profits it pays out.
Withholding Tax
Where the missing 35% of your dividend went, and how to get it back.
Compound Interest
How interest on interest turns time into your biggest advantage.
Total Return
Price change plus dividends: the whole return, and what the SMI leaves out.
Price-to-Earnings Ratio (P/E)
What a share price says about earnings, and what it can't tell you.