What Are Dividends, Anyway?
Glad you asked! Strictly speaking, a dividend is a transfer of assets from a corporation to its shareholders.
A share of stock represents a bit of partial ownership in a business. A successful business typically has a good deal of assets, and management employs these assets to turn profits.
Yet a corporation is an entity separate from its shareholders. You might look at a corporation as a lockbox containing all the assets and earnings of the business. As a shareholder, you own part of that lockbox, but you don't have direct access to its contents. The key to the lock is held by the corporation's management. Only when they decide to unlock the box and hand part or all of the cash inside to shareholders do those shareholders get to benefit directly from what is held inside.
Not all corporations, even those with enormous profits and sizable cash reserves, are willing to unlock the box for shareholders' benefit, preferring instead to keep control of the cash for themselves. But many corporations do. Some pay out only a little, while others, the kinds of stocks we're interested in, pay out a lot.
Furthermore, corporations that have paid dividends in the past have a very strong tendency to continue dishing out cash in the future. The box is opened and cash disbursed on a predictable basis, and over time, these payouts tend to grow larger and larger. From the investor's perspective, the value of a share of the box isn't about the box itself, but rather the growing stream of cash it will provide in the years and decades to come.
