What is a dividend?

A dividend is best understood as a distribution of a portion of a company's earnings to shareholders. This payment is typically made in cash or additional shares of stock and represents a way for companies to share their profits with the owners of the company, which are the shareholders. When a company earns a profit, it has the option to reinvest that profit back into the business or distribute it to shareholders through dividends. Paying dividends can signal to investors that a company is financially healthy and committed to returning value to its shareholders, making it an attractive feature for investors looking for income-generating investments.

Other options do not accurately define dividends. For instance, payments to creditors relate to debt obligations rather than profit distributions, total profit refers to the bottom line of the financial statements, and types of stocks that do not pay interest are describing a characteristic of certain stock types rather than defining what a dividend is.