Ever wish a company would give you a pat on the back for investing in them? A little, ‘cheers for believing in us, mate’? 

Well, some companies do one better: they pay you out what’s known as a dividend.

Dividends are a cash distribution from a company to its shareholders, as a way to reward them for investing in the company. 

How do dividends work?

A public company - aka a company that’s listed on the ASX (or another exchange like the NASDAQ) - has a board of directors. The Board of Directors decide exactly where the company’s profits should go.

Are the profits reinvested back into the company? Are the profits distributed to shareholders? If the ships are sailing and the sun is shining (ie. the company has performed well), it could be both.

Let’s do the math:

• Company X made $100 million in profits over the twelve months to 30 June this year.
• They decide to distribute $60 million of its profits to their shareholders
• They have 10 million shares on issue
• Each shareholder will receive a dividend of $6
  

Dividends are usually paid out quarterly, half-yearly or yearly - and, it’s on top of the hopeful return that you’d receive from the company’s share price performance.

Will I always get dividends?

Unfortunately not, Flux Fam. Dividends are completely discretionary. This means if a company has a tough quarter, the board of directors can decide to slash dividends, or simply not pay them at all for that period.

It’s also important to remember that not every company you invest in issues dividends, so make sure you do your research around the stock you’re investing in before you make your call.