October 2026 Market Topic

When people think about making money in the stock market, they often think about buying a stock at one price and eventually selling it at a higher price. That tried-and-true concept of buying low and selling high. While price appreciation is an important part of investing, especially for long-term investors, it is not the only way to earn a return. Many companies also pay their owners, who are called shareholders, with income along the way. These incremental payouts are called dividends.

Dividends are one of the ways companies can share their success with their owners. Understanding how they work, their value, and the role they can play in a long-term investment strategy can help people make decisions on which companies they would like to invest in.

What is a Dividend?  

When you purchase a share of stock, you are purchasing an ownership interest in a company. Whether that ownership interest is large or small, you now have a piece of that pie. If that company earns a profit, management has several choices of what to do with that revenue. The business has some places that money needs to go, such as salaries or bills, but they could also choose to reinvest it back into the business, pay down debt, or pay a portion of the profit back to their owners.

When a company distributes part of its earnings back to their shareholders, that payment is called a dividend.

For example, imagine you own 100 shares of a company that pays their owners an annual dividend of $2 per share. That would mean that over the course of the year, you would receive $200 in dividend income simply for owning those shares.

Companies often pay dividends quarterly, although timing and amount can vary. Dividends are not guaranteed, but if a company has a long history of paying a dividend, that is usually a strong sign that they will continue that track record.  

Understanding a Dividend Yield

One common way investors can compare dividends is by looking at a dividend yield. Dividend yields show how much annual dividend income an investment currently pays relative to its stock price.

Suppose a stock trades at $100 per share and pays $2 per share in annual dividends. To calculate its dividend yield just divide the dividend per share by the price per share and multiple that number by one hundred, which would come out to 2% in this case.

In simple terms, an investor buying the stock at $100 would receive annual dividend payments equal to about 2% of the purchase price, assuming the dividend remains unchanged.

It is important to note that a higher dividend yield isn’t always better, a company’s dividend yield can rise if its stock price falls. An unusually high dividend yield could also be a warning sign that a company’s stock price has decreased as investors worry about its financial health or its ability to keep paying out that dividend.

This is why it is important to look at the full financial landscape of a company; the size of the dividend is only part of the picture.

The Value of Dividend Growth

A company doesn’t necessarily need to offer the largest dividend today to provide value over time.

Consider a business that consistently increases its dividend as their revenue increases. An investor who continues to hold those shares could receive progressively larger dividend payments over the years. A consistent dividend can also show a company is stable and resilient, even during times of internal or external challenges.

Imagine the company paying a $2 annual dividend incrementally increases its dividend to $2.10, then $2.20, then $2.30. The shareholder doesn’t have to buy more shares of the company to benefit from those increases. The income generated by the shares they already own has grown.

An increasing dividend can also help investors get some insight into the long-term value and strength of a company. By examining the dividends a business has paid overtime, and considering its ability to continue growing those payments, investors can have a clearer understanding of the cash flow a company may be generating. While dividends alone do not determine what a company is worth, they can help evaluate underlying value and long-term potential.

Reinvesting Dividends

Investors don’t necessarily have to take dividend payments as cash, they can also be reinvested, meaning the money is used to purchase additional shares.

This introduces one of the most powerful concepts in long-term investing, compounding.

Imagine again that you receive $200 in dividends. Instead of withdrawing that $200, you use it to buy additional shares. Those new shares may then generate dividends of their own. If those dividends are reinvested again, even more shares can be purchased.

Overtime, this process can create a lucrative cycle: your shares produce dividends, which are used to purchase more shares, then those new shares produce additional dividends and so on.

This effect may seem minuscule at first, but over time, reinvesting dividends can contribute to substantial growth in an investment.

Dividends are Only Part of the Story

While dividends can be valuable, they shouldn’t be the sole metric when evaluating the health and value of a company.

Amongst many other metrics and sentiments, investors should also pay attention to total return, which is the combination of income received from an investment and the change in its value. Dividends are just one component of a much larger story that includes the company’s financial health, profitability, growth trajectory, valuation, and overall mission.

The Big Picture

Dividends are a great reminder of what owning a stock actually means ꟷ owning a piece of a business. They also illustrate the most crucial part of owning a business, making a profit.

Stock prices can fluctuate for countless reasons, but behind the price movements are real businesses generating revenue, earning profits, investing for the future, and, in some cases, sharing a portion of those profits with their owners.

For long-term investors, dividends are a primary consideration when evaluating opportunities because they bring several important pieces of investing together. They can provide income today, contribute to long-term compounding, and offer insight into the financial strength of a business. While dividends are never the only factor we consider, a company’s ability to consistently pay and grow its dividends can be a sign of durable earnings, disciplined management, and long-term stability. This is what makes dividends very useful when analyzing businesses.