Definitions 
Understanding what dividends are is essential to investing. Dividends are non-obligatory payments from companies to their shareholders.
When a dividend is paid, shareholders receive a share of the dividend proportional to their shareholding. For example, if a company in which 1 million shares are issued pays a dividend of £1 million, shareholders will receive a payment of £1 per share. An individual with a shareholding of 1000 shares will thus receive £1000. In practice, most companies publish dividends on a dividend per share basis (DPS).
Dividends are not Obligatory
Companies are never under any obligation to pay dividends. The decision to pay a dividend or not is made by the board of directors (may require approval by shareholders at the annual general meeting). In practice however, most quoted companies aim to maintain or increase dividends on a year-by-year basis. A cut in dividend would inevitably be taken as a sign that things are going rather badly at the company.
Dividends from Profit
Although companies may chose to pay a dividend at any point, in practice most companies will pay dividends out of the profit made in any one fiscal year. Less us imagine that as business makes a profit of $100 million in a given year. Most companies will need to pay corporation tax on this first (let’s say they pay $20 million, leaving them with $80 million). With this £80 million, they may now choose between retaining the earnings, executing a share buy back scheme or issuing dividends.
Tax on Dividends
Finally it’s essential to note that individual (or institutional) shareholders are usually required to pay tax on dividends (note the same earnings are taxed twice). Fiscal rules for dividends vary quite widely from country to country, and it’s worth checking this out before you invest.
