A dividend is a cash payment a company sends its shareholders out of profits. For many investors it's a tangible, recurring return — but a dividend is only as safe as the earnings behind it.
The numbers that matter
| Metric | Formula | Tells you |
|---|---|---|
| Dividend yield | Annual dividend / Share price | The cash return at today's price |
| Payout ratio | Dividends / Net income | How much profit is paid out vs. kept |
| Dividend growth | Year-over-year increase | Management's confidence in future profit |
Is the dividend sustainable?
A payout ratio comfortably below 100% (often 30–60% for a stable company) leaves room to keep paying through a rough patch and still reinvest in the business. A payout ratio above 100% means the company is paying out more than it earns — usually a warning sign.
Beware the yield trap: a very high yield often means the price has collapsed because the market expects a dividend cut. A 9% yield that gets halved is worse than a safe 3% yield that grows.
Yield vs. growth
High-yield stocks pay more now but often grow slowly; dividend-growth stocks pay less today but raise the payout steadily, which can out-earn a high static yield over a decade. Reinvesting dividends compounds the effect.
