Dividends are a way for the company to share its profits with investors. Mature companies tend to share more of their earnings with shareholders in the form of dividends or share repurchases because they aren’t able to deploy that cash themselves at attractive rates of return.
Some companies don’t pay dividends at all, and that isn’t necessarily a bad thing. Businesses with growth potential and strong reinvestment opportunities need to invest heavily in their business to realize that growth and therefore don’t generally return cash to shareholders.
A company’s dividend yield can be calculated by taking the annual dividend per share and dividing by the current stock price. Today, an S&P 500 index fund pays a dividend yield of about 1.3 percent. (Here are some of the best dividend ETFs to consider adding to your portfolio).
