Dividends are often associated with the idea of passive income, which is why it has become very fashionable to talk about them. In addition, everyone likes early retirement and a steady income that will come later, and one of the best solutions for this is to “harvest” dividends. This article will not discuss specific dividend stocks; you can find this type of information in our previous article (Dividend-paying stocks are a smart choice, based on experience (2025)). I'm much more focused on why it's good for the company and why it's good for you if the payment is in the form of dividends. Or is it not so good? We'll find out soon!
💸Dividend-paying stocks by definition
A dividend is the amount of money that a corporation pays to its shareholders, typically, but not exclusively, out of the profits it generates. It is also possible to pay dividends from retained earnings or from loans, but these are more of a negative example. An important element of paying dividends is that this obligation can only be met from “cash”, meaning that dividends cannot be generated using accounting methods.
💰The meaning of dividends
It is important that only companies with after-tax profits are able to pay dividends, i.e. dividends can only be paid after taxation. Dividends are a part of the profits made by companies, which allows you to benefit from the company's success. After payment, the dividend is credited to the investors' accounts, so it is removed from the company's cash flow. By the way, the company does not have to be listed on the stock exchange for this, even a Co., AG or Kft. can do this, but the statements in this article naturally apply to listed, publicly traded, mostly American dividend-paying companies.
Everyone who owns shares in a dividend-paying company is entitled to dividends. As John D. Rockefeller, the famous oil billionaire, said: "Do you know the only thing that gives me pleasure? It's to see my dividends coming in"But why is it such a big deal when a company pays dividends? It's because investors can directly benefit from owning shares in two ways:
- 💵The stock may have a price gain, this is the yield
- 💵A stock can have dividends, which is actually “interest”
There are several major differences between the two. The amount of the former is unknown in advance and can be positive or negative. In contrast, a dividend is a pre-announced amount of money paid by the company at a given time, which is credited to brokerage accounts after taxes and expenses are deducted.
Another important element of dividend payments is that their amount does not depend on market sentiment, but is determined by the company's management based on fundamental data. In other words, if the company has adequate cash-generating capacity, it can pay dividends.
This is of course not necessary, many companies do not pay, even though they could financially do so, for example Adobe Inc. (Adbe), which we also prepared a detailed stock analysis of (Adobe stock analysis), or Veeva Systems (VEEV). If the stock market price is frozen tomorrow, the dividends to be paid will not be jeopardized, companies will continue to pay them.
🧾Dividend calculation
Anyone who thought there was some crazy math behind calculating the dividend yield will be disappointed, and anyone who was afraid of it will be happy because it is quite simple to calculate. You have to divide two numbers, but in fact you don't have to do this, as this is indicated on stock search and analysis sites. However, I would like to draw your attention to the fact that the data from some sources may differ regarding the dividends paid, there may be rounding errors, differences in the data used, and the like. It is also important that certain companies do not show their numbers in USD, because they are either not American or do not collect their income in dollars. An example of this is Games Workshop (LSE:GWA), which is English and we have a stock analysis for it (Games Workshop stock analysis), or for example Computer Modelling Group (TSX:CMG), which is Canadian and we have also analyzed in detail (CMG stock analysis). Therefore, I recommend that everyone check with multiple sources to make sure the published dividend yield is correct, especially if the currency is not listed next to it.
The dividend yield on dividend-paying stocks is calculated by dividing the dividend amount by the current share price. Let's use Realty Income (O) data: 3.22 USD/56.81 USD=5.67%. It is easy to guess from this that if the share price changes, the percentage value will also change. That is why we display the maximum, average and minimum dividend yield for the given period on our stock pages, as well as the differences from these. Let's draw the relatively simple conclusions together:
- ✨If the stock price falls, the dividend yield will increase in relation to the capital, if it rises, it will decrease.
- ✨Averaging, when you take a position in multiple steps during a falling stock price, increases the dividend yield on capital.
Investors usually approach it the other way around. They simply look at the company's free cash flow and the payout ratio. For example, if 50% of the cash is paid out, then half of the free cash is divided by the number of shares of the company, which is the dividend per share, usually expressed in dollars. From there, it's just a step to do the above calculation.
📌In practice: In relation to the above two statements, in practice, what often happens is that investors start buying a falling stock, hoping that the price will turn around and correct and they will receive a higher dividend based on their capital. This is how you can reach into “falling knives”, when there are fundamental problems behind the price drop and the price drop far exceeds the dividend increase. This is how you can get caught in so-called “value trap” situations, so you should never blindly buy something because it has become cheaper on paper, you have to look at the underlying driving forces.
🪙Dividend accounting
Basically, I do not deal with the accounting of various accounting elements in my articles, simply because an investor does not need to be fully aware of how this is done. Moreover, I am not an accountant, I am not sufficiently familiar with the mysteries of American accounting to make professionally appropriate statements. However, it is still worth mentioning, for the sake of a glance, where exactly dividend-paying companies “book” the amount of their dividends.
As I mentioned, dividends can only be paid after the profits have been taxed. At least in theory, because in practice, the dividend payment obligation can also be met from retained earnings, loans, or the sale of components. But for now, I will stick to the profitable business, meaning that revenue comes in, a part of which is profit before taxes, which you may encounter as EBITDA (EBITDA meaning), it is taxed, and then the dividend is paid. In the image above, I highlighted how this appears in the cash flow statement, from the company's perspective it is an expense, so the item is negative.
This leads to the cash payout rate already mentioned. The lower this is, the less the dividend burdens the company's balance sheet. Since we already have individual charts available for some stocks, I have included the AT&T (T) belonging to the company.
Another thing you can see in the image above is that the payout ratio dropped drastically after 2022, why? Two things could have happened, AT&T (T) suddenly had extremely high revenue and thus profit, or they cut their dividend. Since this story is already 3 years old, it is not a big secret: the latter happened, after 36 years of dividend payment history, they cut the dividend by ~42%, which is also visible in the yellow graph above.
🧮Dividend payment: why does a company pay dividends?
In the capitalist operating model, the most important criterion for every company is to generate profit. One of the best measures of the efficiency of their activities is the “cash” they generate, as this is what can actually be used to do something. What can a company do with the cash it generates:
- ☝🏻you can reinvest it in your production activities (this is actually a necessity, it keeps your business going)
- ☝🏻You can start investing and try to grow organically
- ☝🏻can acquire, that is, buy up other companies or brands
- ☝🏻you can use it to reduce your debt, if you have any
- ☝🏻can be paid as dividends
- ☝🏻you can buy back your own shares
- ☝🏻You can "sit on it", that is, you can create a cash reserve or invest it in something, such as government securities
The fact that a stock pays dividends is fundamentally neither a positive nor a negative characteristic. You should always examine the company's underlying intention behind paying dividends. If it has been in a bad financial situation and is now recovering from it, this can be seen as a positive sign. An example of this was Pfizer in 2021, which withdrew its planned dividend cut due to the size of the revenue from COVID vaccines. We made a nice unique graph for you, you should check it out (Pfizer (PFE) custom charts). On the other hand, if it simply cannot grow any further and cannot reinvest the money in meaningful investment or development, then this can be viewed as a negative.
🧨What happens when dividends are paid?
When the company pays you its dividends, it reduces its own cash position, meaning it narrows its own room for maneuver. This is not the most efficient way to use money in an “ideal world.” It would be much better if this amount of money were invested in some value-creating investment and the company grew organically instead. This would drive up the share price, i.e. increase the value of the company, from which the investor also benefits in the form of a capital gain.
The situation is that the success of investments cannot be taken for granted. It is quite possible that the company misjudges the market, produces a bad product or acquires a competitor, thereby destroying value rather than creating it. In other words, every investment and acquisition carries risks. It is also quite possible that a mature company simply cannot or is barely able to grow. A good example of this is the consumer goods sector, including older mammoth companies such as General Mills (GIS), Coca-Cola (KO) or Pepsi (PEP). If there is no room to grow an already huge company due to the large market size, then it is worth returning the money generated to the owners in some way.
🎯How much value does paying dividends create?
Allow me to digress a little, because a very important element of investing is value creation. We, investors, do not own dividend-paying stocks so that the company can burn the money it generates, but so that it can return it to us in some form. The two most typical elements of value creation, in addition to appropriate investments, are share buybacks and dividend payments.
The problem with buying back your own shares is that the company can do it from the market, at roughly the same price as you. If the company prospers, the share price rises, the company's shares may be overvalued, so it cannot buy them back cheaply. In such cases, it is more worthwhile to pay out the same amount of money as a dividend or, say, to make value-creating investments with it.
💡On the other hand, if the company is undervalued, then a larger number of shares can be bought back with the same amount of money, meaning that this may be a more efficient way of using the money. The “master” of the above share buyback and issuance was former Teledyne CEO Harry Earl Singleton (Harry Earl Singleton).
For the above, they use a metric called shareholder yield, which the Dividend Monk website has a pretty good description of (Shareholder Yield). There are problems with this metric as well, but I think the description gets the point across well, and it's worth reading.
🔄Taxation of dividends
In most countries, shareholders also have to pay taxes on dividends. Some states can tax them as high as 50%, while others have very low dividend tax rates. So, if I go back to what I consider to be an efficient use of cash, then the ownership side also needs to be examined.
🌐 Dividend withholding tax rate by country (2025, for individuals, alphabetical order)
| Country | Withholding tax | Country | Withholding tax | Country | Withholding tax |
|---|---|---|---|---|---|
| 🇦🇺 Australia | 30% | 🇦🇹 Austria | 27.5% | 🇧🇪Belgium | 30% |
| 🇨🇳 China | 10% | 🇨🇭 Switzerland | 35% | 🇨🇦 Canada | 25% |
| 🇩🇰 Denmark | 27% | 🇩🇪 Germany | 26.375% | 🇪🇸 Spain | 19% |
| 🇫🇷 France | 28% | 🇫🇮 Finland | 30% | 🇬🇧 United Kingdom | 0% |
| 🇬🇷 Greece | 5% | 🇭🇰 Hong Kong | 0% | 🇮🇪 Ireland | 25% |
| 🇮🇳 India | 20% | 🇮🇹 Italy | 26% | 🇯🇵 Japan | 15% |
| 🇰🇷 South Korea | 22% | 🇵🇱 Poland | 19% | 🇳🇱 Netherlands | 15% |
| 🇳🇴 Norway | 25% | 🇳🇿 New Zealand | 33% | 🇸🇪 Sweden | 30% |
| 🇸🇬 Singapore | 0% | 🇺🇸 United States | 15% | 🇹🇷 Turkey | 15% |
If the country in which you are tax resident would deduct higher dividends than the paying country, you will have to pay the difference, but this can be influenced by many things, for example the type of investment account, this is called TBSZ in Hungary, ISA in England, but there are similar formats in other countries. It also matters whether the two countries have a double taxation agreement, you should check this individually in each case.
🇭🇺Dividend taxation in Hungary🇭🇺
📌In practice: It is worth adding to the above what few people think about: if there is a prosperous company with a very high internal rate of return, which can be described by ROIC, ROCE and similar metrics, then this will be built into the price, but you still don't have to sell the stock, but it can sit on the paper as a floating profit.
In contrast, in the case of dividends, you do not choose the date of taxation, and you also incur an investment risk because you have to reinvest the dividends. What is the guarantee that, taking into account the tax-reduced rate, you will be able to invest as efficiently as the company did before? Nothing, instead you will struggle with small amounts and your money will not work until then.
💰Dividends and dividend-paying stocks
Holding dividend-paying stocks has a long tradition on the American stock market. The receipt of dividends can be seen as a kind of passive income. Once you have established a stable portfolio of dividend-paying stocks, you don't have to do much with it except count the money coming in.
That's why many people use stable dividend-paying stocks as a kind of "bond substitute." This means that in an economic environment that guarantees low interest rates, such as the period between 2015 and 2020, neither bank deposits nor bonds could pay as much interest as some stocks provide. Therefore, capital flowed into such securities, chasing higher yields.
However, the wind often reverses, as AT&T (T) example above. I intentionally left out the graph from early 2021, which still looked good from a yield-seeking perspective. Homework: everyone, look at what has happened to the dividend since then❗
🧠The point is psychology
Dividend-paying stocks have two huge advantages over non-dividend-paying stocks:
- Stability: Many people buy dividend-paying stocks because they expect to receive dividends. Some people live off of them, meaning they don't just use dividends as a supplement to their salary. This is a kind of early retirement, provided that the amount of the dividend reaches the level of the expenses necessary for their lifestyle. Since dividend payments are a very clearly stated demand from investors towards companies, companies try to avoid cutting dividends. Of course, this also causes them to fall on the other side of the horse, for example Exxon Mobile (XOM) has already covered its dividends with loans several times, so strong are the expectations from the owners.
- It's easier to hold them when falling: Stock trading and investing are 90% psychology. Many people don't take this seriously, although in the long run it is clear that without proper psychological preparation, the number of bad decisions will increase drastically. Imagine a market panic when the price of our shares falls. The horror of permanent capital loss looms before our mental eyes. In this situation, which share is easier to hold: the one that pays a 10% dividend even at the beaten-down price, or the one that pays nothing? Moreover, due to averages and taking on new positions while the share price is falling, the dividend rate may even increase, which is another psychological bastion to cling to.
I would like to give two examples of the latter to make it more tangible. In the picture, AT&T (T) and the dividend, as a percentage, over the past 5 years. The price ranged somewhere between 26 and 43 USD. When it crashed, it was possible to realize an annual dividend of around 8%. I wonder which stock is easier to hold, the one that falls 30% but pays a 6% dividend, or the one that also falls 30% but pays nothing? I'm not saying that dividend-paying stocks are better, but there is a psychological advantage in the fact that money is still flowing in during the fall.
📌In practice: I often cite AT&T (T) as an example because it's a great example, depending on which part of the time frame you look at. I made the mistake of trying to use the stock as a bond substitute because of its high dividend yield, but don't do that. It ended up taking a big hit, even with the high dividend yield.
🪞How do dividends work for the owner?
As I mentioned, dividends must be physically paid to the owners. In other words, following the analogy of “it’s better if I have the money than if the company has it”, on the one hand, it increases the personal wealth of the investors, and on the other hand, this amount can be reinvested in other investments. Moreover, prosperous companies tend to increase the amount of dividends. These two options lead us to the concepts of reinvesting dividends and compound interest. It is not by chance that the latter was called the “8th wonder of the world” by Nobel Prize-winning physicist Albert Einstein.
Let's say that tomorrow, due to some extraordinary situation, the Securities and Exchange Commission (SEC) suspends trading on the US stock market. In such a case, speculators on stock price changes would be in big trouble, since the change in stock price depends solely on stock market trading. However, dividend payments do not. A company produces products, buys and sells, has revenue and profits, and of course pays dividends, independently of the securities markets.
👉Let's look at an example!
I made a table of what happens to your money over 20 years if you receive a 5% dividend every year. In the first case, the dividend stagnates, only compound interest works, in the second the company increases its dividend by 5% per year, and in the third by 10%. I also included a zero year to make the calculation more understandable, and the increase occurs on the last day of the first year, so the additional effects do not yet apply in the first year. These are not numbers pulled out of thin air, this is a scenario that could happen in reality. For example, in October 2020, Abbvie (ABBV) raised its dividend by 10%, which was above 5% at a price of 86 USD.
Obviously, the current example does not take into account a lot of things, there is no dividend cut, the company's cash generation capacity is increasing, there is no inflation, the stock price does not move, etc., but since this is a demonstration tool, I will generously omit this.
As you can see, the 10 million capital became 139 million in two decades, which is roughly 65% annual growth compared to the initial capital. However, you should also note that the numbers increase extremely slowly in the first years, so you need to give the compound interest time to work. So let's turn things around now, let's see what happens if we deduct taxes, for example 1.25% per year, and inflation, for example 3% per year, from the return. The end result changes quite drastically, which is one of the reasons why you can't become a millionaire so easily from dividends alone.
Obviously, these are extreme scenarios, the chances of them happening at such a high level are very small, and of course there are a lot of pitfalls, but in an ideal world, the above numbers could theoretically be achieved.
📌In practice: the above typically don't work because a typical phenomenon of falling markets is dividend cuts. And everyone diversifies, meaning you'll buy 20-30 stocks, where unexpected things will happen to a few stocks. What can you do about this? Buy a dividend-paying ETF, which may also have dividend cuts, but at least you don't have to deal with the stocks individually.
🧩How much does the dividend matter?
It's an interesting question to ask how much of a stock's total return potential is made up of dividends alone. The total return for a stock is made up of two things: the price gain and the dividend rate. The first is relatively simple, the difference between the buy and sell price. The second is a bit trickier, as it involves the dividend yield, increases, reinvestment, and how dividends and increases affect the price.
Let's say you buy a $100 stock that pays a $5 dividend, or a 5% dividend yield. By the end of the first year, the stock price has risen to $110, and you've received the $5 dividend, or a total of $115 in "wealth." What could happen then?:
- You spend the dividend, the company does not raise a dividend, so you are left with $110 in assets.
- you can reinvest the dividend into the stock, the company does not raise dividends, the total value remains 115 USD (for now let's ignore the fact that you can't buy the stock for that much, let's say it's a fraction of a share)
- you can spend the dividend, but the company raises its dividend by 5%, meaning that next year you can expect a dividend yield of 5.25%, and your total assets will remain at 110 USD
- You reinvest the dividend, the company raises the dividend by 5%. Next year you get a 5.25% dividend, but at $115.
If you apply the above to a 10-20 year horizon, you will get quite different results. Another question you may have is whether there is a relationship between the increase in the share price and the payment of dividends and their increase? The fact is that there is. The value of a company cannot be constant if it is able to continuously achieve higher profits and pays more and more dividends. In the long run, the market will inevitably price this in, which will lead to an increase in the share price. The question is, how does all of this factor into the total return?
📘Some studies on the topic
Fortunately, you don't have to calculate this yourself, there are studies written by very smart and educated people. The first interesting source can be found on the Snider Advisors website (Dividends Play a Big Part In Performance), the figure here shows the additional returns from reinvesting dividends well. Then there is another one from Janus Henderson's site, where he examined the period between 1930-2019 based on the image referenced from Morningstar. Here, dividends contributed 42% to the total return. For those who like to read studies, I recommend reading Guinness Atkinson Funds' work (Guinness Atkinson Funds: Why Dividends Matter). This publication draws the conclusion regarding periods of low stock market growth (between 1940 and 1970). Here, dividend reinvestment contributed 75% to the total return, but this is obviously a special case.
A relatively recent study by Hartfordfunds illustrates the same thing with a lot of graphs, which the above sources have already done, only here the time frame is different (The Power of Dividends: Past, Present and Future). If that weren't enough evidence, you can still study the work of two value investors, Professors John C. Bogle and Jeremy J. Siegel. The bottom line is that dividend reinvestment and compound interest are one of the biggest catalysts for total returns over the long term.
But always pay attention to one thing: the chosen time frame significantly influences the results. In other words, if someone wants to refute or support their own thesis, they simply change the beginning and end of the time period, and different results will appear.
📌In practice: When I started investing years ago, I wasn't really a fan of dividend-paying companies. Many people think that just because a company pays dividends, it's a quality company and that this is an indicator of high returns, but the relationship is the other way around. Quality companies, in addition to their many value-creating activities, such as excellent internal rate of return, share buybacks, value-creating acquisitions, and the like, often pay dividends, which is a byproduct of brutal cash generation. After a while, you simply can't reinvest all the money in the world back into the business. But that doesn't mean that just because a company pays dividends, it's also a quality company.
⚖️Find dividend-paying stocks with us!
You can also search for dividend-paying stocks on our site, and there are several functions at your disposal for this. On the one hand, in the traditional way, by entering the stock ID, the subpage will also list several metrics related to dividends. You should search for these in the side box next to the graph on the right.
Your other option is to use the interface designed for direct stock screening, which you can access here: iO Charts Stock filter. By adding a filter, you can add new filtering criteria, and on the right side, you can rearrange the listed data with the “change columns” option. By clicking on the column headers, the page reverses the order, changing the list from “descending to ascending” or “ascending to descending”. I have highlighted the most important elements in red in the image above for easier understanding.
Dividend topic summary
Dividend-paying stocks and dividend harvesting are also a kind of “philosophy” and are not for everyone. However, calm investors will love it, as it can provide passive income, but it really has an effect in the longer term. In other words, one of the most important aspects is the time horizon, compound interest and dividend growth can really work for you then. Fortunately, not only dividends but also share price growth contribute to the total return, the effects of the two are added together. The disadvantage of dividend-paying stocks is that most states impose a special tax on dividends, you can read about the problems of this and how to resolve the situation in the following article: Dividend Taxation in Hungary – What to Watch Out for in 2025
Frequently Asked Questions (FAQ)
What is the meaning of dividend?
A dividend is a share of profits paid to shareholders, which a company returns to its owners (i.e. investors who own the shares) from its profits. Simply put: if you own shares in a company and that company makes a profit, you may receive money from it - this is called a dividend. Dividend means dividend in English. Dividend yield shows the rate of dividend.
What is dividend law?
A dividend right is an ownership right attached to a share that ensures that the share holder can share in the company's profits if the general meeting decides to pay a dividend.
The right to dividends means that:
- if a business entity (e.g. a joint-stock company or a limited liability company) operates profitably,
- and the members' meeting or general meeting decides to pay a portion of the profit to the owners,
- then the owner (shareholder or business unit owner) is entitled to the dividend proportionally.
WHAT does cash flow mean?
Cash flow shows how much cash comes in and out of a business during a given period. In simple terms, cash flow shows whether a company actually has money in its pocket – not just paper profits, but real, movable cash.
What does CEO mean?
CEO is the abbreviation for Chief Executive Officer.
What is a dividend portfolio?
A dividend portfolio is an investment portfolio that aims to generate regular dividend income - that is, it consists of stocks (or ETFs, funds) that pay stable and preferably growing dividends.
What is it for?
- It can be a source of passive income (e.g. for retirement, financial freedom).
- It can add stability to the portfolio because dividends often fluctuate less than the exchange rate.
- In the long run, reinvested dividends generate substantial returns (compound interest effect).
What is the meaning of dividend preference?
Dividend preference (in English: dividend preference vagy preferred stock) means that a share has priority in dividend payments over common shares.
The dividend preference shareholder:
- receives dividends before common shareholders (even if the profit is only partially sufficient),
- often entitled to a fixed dividend (e.g. 5% per year),
- you do not have limited voting rights (in return you receive an advantage in receiving dividends),
- In the event of a lack of dividend payments, your entitlement often accumulates (this is the “accumulator” type).
Which is better: dividend ETFs or individual dividend stocks?
Whether a dividend ETF or individual dividend stocks is the “better” choice depends on your goals, the amount of capital you have, your level of investment knowledge, and the amount of time you want to invest. The following comparison will help you decide which is right for you:
⚖️ Which one is right for you?
| Question | ETF | Individual share |
|---|---|---|
| I'm a beginner | ✅ Yes | ❌ I'd rather not |
| Needs a lot of control | ❌ No | ✅ Yes |
| I want to save time. | ✅ Yes | ❌ No |
| I like to analyze companies. | ❌ Not important | ✅ Yes |
| I want passive income | ✅ Yes | ✅ Yes (but more complicated) |
| I'm starting with little money. | ✅ More efficient | ❌ It is harder to diversify |
Important addition: if you have the right knowledge of stock analysis, you can put together a better quality portfolio with individual stocks, but with much more work and complexity.
What is the dividend tax rate?
The dividend tax rate varies from country to country and depends primarily on where you are tax resident and on which stock exchange in which country the given share is listed.
Legal and liability statement (aka. disclaimer): My articles contain personal opinions and are written solely for my own entertainment and that of my readers. iO ChartsThe articles published on do NOT in any way exhaust the topic of investment advice. I have never wanted, do not want and am unlikely to provide such in the future. What is described here is for informational purposes only and should NOT be construed as an offer. The expression of opinion is NOT in any way considered a guarantee to sell or buy financial instruments. You are SOLELY responsible for the decisions you make, and no one else, including me, assumes the risk.
