Dividends explained: where stock payouts come from

A dividend is a payment some companies make to their shareholders out of profits. If you own 100 shares and the company pays 50 cents per share, you receive $50. The key caveat: dividends are not guaranteed. A company can cut the amount, pay less often, or cancel the payment entirely at any time. Where does the money come from? When a company earns a profit, it has two choices. It can reinvest the profit back into the business, or it can distribute part of it to the people who own shares. According to Wikipedia's overview of dividends, any profit not paid out becomes retained earnings, and a corporation is usually prohibited from paying a dividend out of its capital — only actual profits, current or accumulated from earlier years, are available to distribute. That tradeoff explains which companies pay and which do not. As Fidelity explains in its dividend primer, dividend payers tend to be larger, established businesses rather than young, fast-growing ones.

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