Not all companies pay dividends. Fast-growing tech companies like Amazon or Tesla prefer to reinvest every penny back into the business. But mature, stable companies — think BP, Unilever, or HSBC — generate more cash than they need for growth, so they return the surplus to shareholders as dividends.
How dividends work in practice
When a company's board declares a dividend, they set four key dates:
The most important of these is the ex-dividend date. Buy the shares before this date and you receive the dividend. Buy on or after this date and you don't — the previous owner does.
Dividend yield: measuring what you earn
To compare dividends across different stocks, investors use the dividend yield:
If a share costs £10 and pays 40p in annual dividends, the yield is 4%. That's equivalent to a 4% interest rate — but unlike bank interest, it can grow over time if the company raises its dividend.
Growth stocks vs dividend stocks
| Dividend stocks | Growth stocks | |
|---|---|---|
| Income | Regular cash payments | Rare or none |
| Risk | Generally lower volatility | Higher volatility |
| Best for | Income seekers, retirees | Long-term wealth builders |
What this means for you
Dividends are powerful in two ways. First, they provide income you don't have to sell anything to receive — critical for retirees who need regular cash. Second, if you reinvest dividends (use each payment to buy more shares), the compounding effect is dramatic. Studies consistently show that reinvested dividends account for roughly half of long-run stock market returns.
A warning: a very high dividend yield isn't always a good sign. Sometimes it means the share price has collapsed (pushing yield up mathematically) — so always check whether the company can actually sustain its dividend before chasing the highest yield.
Don't work for your money — make your money work for you. Dividends are one of the simplest ways to put that principle into practice.