Definition
A dividend is a distribution of part of a company's profits or reserves to its shareholders, most often paid in cash and declared per share. Dividends are decided by the board and are not guaranteed.
How it works
Dividends follow a timeline: declaration, the ex-dividend date (buyers from that date no longer receive the payment), the record date and the payment date. On the ex-dividend date the share price normally falls by roughly the dividend, because that cash has left the company.
A dividend is a transfer of the company's existing cash to shareholders, not new value, and the board can cut or suspend it when profits or cash flow weaken. Payments may also be subject to withholding tax or other tax treatment, depending on the shareholder and the market.
Formula / convention
Dividend cash received = Dividend per share × Number of shares held
Illustrative example
Illustration with fictional figures: Company A pays HK$0.60 per share and an investor holds 2,000 shares, so the cash received is 2,000 × HK$0.60 = HK$1,200 before any tax. If the price was HK$12.00 before the ex-dividend date and falls to about HK$11.40 afterwards, the 2,000 shares drop from HK$24,000 to HK$22,800, so the HK$1,200 of cash is offset by a HK$1,200 lower share value.
What to watch for
A dividend is a return of the company's own cash, not a free profit, and a company that pays out more than it earns may be draining its financial strength. Dividends can be reduced or suspended at any time.