A dividend is a portion of earnings that a company pays out to its shareholders. If the Tattoo Advertising Co. (Ticker: YOWCH) is earning roughly $4 in profit per share each year, it might decide that it will issue $1 per share annually to shareholders and use the rest of the money to help build the business. If so, it will probably pay out 25 cents per share every three months.
This may seem like a pittance, but it adds up. If you own 500 shares of a company that's paying $1 per share in dividends, you'll be receiving $500 per year from the company.
If you're evaluating a company's dividend, make sure you're looking at its dividend yield -- the current annual dividend divided by the current price. Here's why it matters: If two companies are each paying $2.50 per share in dividends, but one company is trading at $25 per share and the other at $50 per share, you'll get more dividend per invested dollar with the first company. Its dividend yield is 10%, vs. 5% for the second company.
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This article was originally published on Feb. 17, 2005. It has been updated. The Fool is investors writing for investors.