A dividend is a cash payment that a company sends to its shareholders — it's literally getting paid for owning a stock. When a company earns profits, it has two main choices: reinvest those profits back into the business (hiring, building, developing new products) or return some of those profits to the people who own the company — the shareholders. Companies that choose to share profits do so through dividends, usually paid quarterly (four times per year). If you own 100 shares of Coca-Cola and they pay a quarterly dividend of $0.485 per share, you get $48.50 deposited into your brokerage account every three months — just for holding the stock.

The dividend yield tells you how much income a stock pays relative to its price. It's calculated by dividing the annual dividend per share by the stock price. If a stock costs $100 and pays $4 per year in dividends, the yield is 4%. The average dividend yield for S&P 500 companies is around 1.3%, but some sectors pay much more. Utilities, real estate investment trusts (REITs), and consumer staples companies tend to have higher yields — AT&T, Realty Income, and Procter & Gamble are classic examples. Some companies have increased their dividend every year for 25+ consecutive years — these are called 'Dividend Aristocrats,' and they include names like Johnson & Johnson, PepsiCo, and 3M.

Dividends create a powerful compounding effect when you reinvest them. Most brokers offer a DRIP (Dividend Reinvestment Plan) that automatically uses your dividend payments to buy more shares. Those new shares earn dividends too, which buy even more shares. Over decades, this snowball effect is massive. If you invested $10,000 in the S&P 500 in 1990 without reinvesting dividends, you'd have around $150,000 by 2024. But with dividends reinvested, that same $10,000 would be worth over $220,000. That extra $70,000+ came entirely from reinvesting dividends — money your money made while you did nothing.

Not every company pays dividends, and that's not necessarily a bad thing. High-growth companies like Amazon, Tesla, and Meta historically didn't pay dividends because they believed they could generate better returns by reinvesting profits into growth. Recently, Meta and Alphabet started paying dividends for the first time — a sign of maturation. When evaluating dividend stocks, don't just chase the highest yield. An unusually high yield (say 8-10%) can be a warning sign that the stock price has crashed or the dividend might get cut. Look for companies with sustainable payout ratios (dividends as a percentage of earnings, ideally below 60%), consistent earnings growth, and a history of maintaining or increasing their dividend. Quality over quantity.