Put simply, a dividend is a portion of a company's earnings that the firm 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 $0.25 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.
For specific dividend investing ideas, see:
This article was originally published on Feb. 17, 2005. It has been updated. The Fool has a disclosure policy.