Dividend: Definition, calculation and facts

Glossary

What is a dividend?

Dividend, derived from the Latin word dividere meaning ‘to divide’, is a (usually annual) profit distribution from companies to their shareholders. Companies choose to distribute dividends to reward shareholders for their investment. These payments can take place in the form of cash as well as in the form of extra stocks.

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What is the difference between profit and dividend?

Profit and dividend are not the same. Profit is the total amount a company earns after deducting costs. Dividend is a portion of that profit that is paid out to shareholders, though this is not mandatory.

What is the purpose of a dividend?

Its goal is to reward shareholders and strengthen confidence in a company. Companies that regularly distribute dividends demonstrate stability and profitability, which often increases demand for their stocks and positively influences the stock price. It is important here that the company has sufficient reserves to distribute dividends.

For shareholders, dividends offer a passive income stream that can help build wealth over the long term. This can make dividends attractive for those seeking a dividend yield.

Distributing dividends in 3 ways

There are different ways a company can distribute dividends if the company makes a profit. These are:

• Cash: The company pays a certain amount per stock to the shareholders. This is also called ‘cash dividend’.
• Stock: Instead of currency, a company can also distribute new stocks. 
• Choice: You can choose to receive money or get extra stocks.

Not distributing dividends

Some companies choose not to distribute dividends. This often occurs with fast-growing companies that reinvest their profits rather than paying them out. For example, to conduct research, expand the company, or innovate in new technologies. Therefore, it does not directly mean that investing in a company without a dividend payout is a bad choice. It can also indicate that there are plans for the future.

How much dividend yield can you expect?

Dividend yield can vary greatly depending on the type of company and the sector. Low dividend payout is often seen in young companies wanting to reinvest their profits for growth. High dividend payout is often found in companies with a stable cash flow that want to reward investors with a higher return.

Calculating dividends

The amount of the dividend payout is not fixed. It depends on the company’s profit and the strategy it follows. Do you want to calculate the dividend yield? You do this by dividing the annual payout per stock by the current stock price and multiplying this by 100 per cent. This gives you a percentage, which gives you an idea of the return you can expect.

The formula

You can use the following formula to calculate the dividend yield:

• Dividend yield = (annual dividend payout / current stock price) × 100

Suppose you bought stocks in a company and the annual dividend per stock is € 4. The purchase price of the stock was € 100. Then the dividend yield is (4 / 100​) × 100 = 4%

How much net dividend do you keep?

Tax must be paid on dividends. In the Netherlands, 15% dividend tax is withheld by the company distributing the dividend. This is a withholding tax on income tax. This means that when you receive € 100 in dividends, you pay € 15 in tax and keep € 85 net. You may subsequently offset this withheld dividend tax against income tax in box 3, where your assets are taxed.

High-dividend stocks

High-dividend stocks, or dividend stocks, are stocks of companies that typically distribute a high dividend. Characteristic of these stocks are a high dividend yield, and a stable or slightly growing dividend per stock. Often these companies have a high payout ratio, usually above 50 per cent. This means that a large part of the profit is distributed as a dividend.

Dividends and (ETF) funds

Besides companies, funds and ETFs can also distribute dividends. The amount of this dividend is based on the dividend payments of the companies in the portfolio. In many cases, you can choose yourself whether you want to receive the dividend or have it reinvested.

Some funds focus on companies that offer an annually growing dividend, with the aim of generating stable income in the long term. Other funds concentrate specifically on companies with a high dividend yield, meaning the ratio between the annual dividend payout and the stock price.

What do dividends mean for investors?

For investors, dividends are a way to generate predictable income rather than quick price gains. Investors who choose dividend stocks can benefit from both the company’s growth and the regular dividend payments. Want to know more? Then read our page on ‘everything about dividends’.

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All views, opinions, and analyses in this article should not be read as personal investment advice. Individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.