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Originally published Saturday, July 16, 2011 at 10:01 PM

Coming to terms: Dividend

The Motley Fool

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Q: What's a dividend?

A: It's a payment that many companies make to shareholders out of their earnings (profit).

If a company earns $2 per share in profit, it might decide to issue $1 per share annually to shareholders, using the balance in other ways, such as building its business or paying down debt.

It will probably pay out 25 cents per share every three months. This may seem like peanuts, but it adds up.

If you own 400 shares of a company that's paying $1.50 per share in annual dividends, you'll get $600 per year from the company.

Plus, healthy companies generally increase their dividend amounts periodically. (It's not unusual for smaller, faster-growing companies, or ones without relatively predictable earnings, to not pay a dividend.)

You'll often see a dividend expressed as a yield. A company's dividend yield is its annual dividend divided by its current stock price.

So a company paying $2 per year and trading for $50 per share would have a yield of 4 percent (2 divided by 50 is 0.04).

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