A dividend is a portion of profits that a company distributes to its shareholders. If you own shares in a company that pays dividends, you periodically receive an amount per share. It is one of the ways investing generates returns, alongside capital gains.
How does dividend work?
When a company makes a profit, it can use that profit in two ways: reinvest in the company or distribute it to shareholders. Many companies do both. The portion that is distributed is the dividend.
Dividends are usually paid quarterly or annually. The amount is expressed as a fixed amount per share. If a company pays 2 euros in dividend per share and you own 100 shares, you receive 200 euros.
Dividend yield
The dividend yield indicates how much dividend you receive relative to the share price. The calculation is simple:
Dividend yield = (annual dividend per share / price per share) x 100%
A share that costs 50 euros and pays 2 euros in dividend per year has a dividend yield of 4%. That is comparable to interest on a savings account, but with the added benefit (and risk) of price movements.
Types of dividend companies
Dividend aristocrats
Companies that have increased their dividend for at least 25 consecutive years. Think of companies like Procter & Gamble, Johnson & Johnson, or Coca-Cola. These companies are typically stable and predictable.
High-dividend stocks
Companies with a dividend yield above 5%. These are often companies in sectors such as real estate (REITs), utilities, or telecommunications. Note: a very high dividend can also be a warning sign that the market expects a dividend cut.
Growth companies without dividend
Many technology companies do not pay dividends. They reinvest all profits into growth. Amazon, Alphabet, and Meta did not pay dividends for years. Investors profit through capital gains instead of dividends.
Dividend reinvestment
One of the most powerful concepts in investing is dividend reinvestment. Instead of withdrawing the dividend, you use it to buy additional shares. Over time, this creates a snowball effect: you receive dividends on an ever-growing number of shares, causing your dividend to grow further.
This effect is called compound interest or compound growth. Over the long term, reinvested dividends can account for a significant portion of your total return.
Dividend and taxes
In the Netherlands, dividends fall under box 3, just like the rest of your investments. You don't pay separate tax on the dividend itself, but on the total value of your investments as of January 1st. You can read more about this in the article on investment taxes.
Note: for foreign shares, withholding tax is often deducted at source. The US, for example, withholds 15% dividend tax. You can partially offset this through your tax return.
Dividend ETFs
Don't want to select individual dividend stocks yourself? There are ETFs that specifically invest in companies with high or growing dividends. Examples include the Vanguard High Dividend Yield ETF and the SPDR S&P Global Dividend Aristocrats ETF. This way, you get diversification and dividends in one package.
What should you watch out for?
- Dividend history: check whether the company has been paying stable or growing dividends for years. A one-time high dividend says little.
- Payout ratio: the percentage of profits paid out as dividend. Above 80% is risky, as there is little room left for setbacks.
- Debt: companies that finance dividends with debt rather than profits are a red flag.
- Sector: some sectors (utilities, real estate) naturally pay more dividends than others (technology, biotech).
Dividend is not free money. On the ex-dividend date, a share's price typically drops by the dividend amount. It is a shift in value, not a creation of value. The real power of dividends lies in the combination with reinvestment and a long investment horizon.