dividend

The distribution of part of a company's earnings to shareholders, usually twice a year in the form of a main dividend and an interim dividend.

Normally, the dividend is expressed on a 'per share' basis, for instance - 3p per share. This makes it easy to see how much of the company's profits are being paid out, and how much are being retained by the company to plough back into the business. So a company that has earnings per share in the year of 6p, and pays out 3p per share as a dividend, is passing half of its profits on to shareholders and retaining the other half.

Directors of a company have discretion as to how much of a dividend to declare, and they don't have to pay a dividend at all. Indeed , for young growth companies making no profits dividends are not generally expected.

When they are expected, however, the City hates to be disappointed! Fund managers rely on big companies producing consistent dividends year after year, and wobetide the company that surprises the City by announcing a reduced or nil dividend.

As a private investor, it is worth checking the dividend history of the company you invest in to see if it has produced a reliable stream over the years. If income is important to you (as opposed to capital growth), the dividend yield is vital information to you.

Note that dividends are nearly always paid in cash, but they can also be in the form of stock (scrip dividend).