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Definition of 'Dividend'

A dividend is a payout from a company. Sometimes it is referred to as a payout from a company's earnings but this is not always technically accurate because it is possible that the dividend exceeds the earnings for the company for any period, this, however, is rare.

The board of directors decides how much to pay in dividends to each class of shareholder. Typically dividends are only paid on ordinary shares. When the dividend is announced it is usually done so in dollars per share. When quoted as a percent of the stock's market price it is referred to as a dividend yield.

Some companies will not pay dividends and will instead retain all earnings to pay for growth. Investors in companies such as this expect to achieve a higher return through the growth in market value of the stock rather than receiving income through dividends.

In theory companies that pay dividends should be comparably priced to companies with similar earnings that don't pay dividends. Evidence, however, shows that investors favor dividend paying companies over non-dividend paying companies.

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