A dividend stock is a share of ownership in a company that returns a portion of its earnings to its shareholders in the form of a cash payment, known as a dividend.

Key characteristics of dividend stocks:

• Source of Income: Dividends provide regular income to investors, which can be a key component of a long-term investment strategy, especially for retirees or those seeking consistent cash flow.
• Payout Frequency: Dividends are typically paid quarterly, though some companies pay monthly, semi-annually, or annually.
• Dividend Yield: This metric indicates how much a company pays out in dividends each year relative to its share price. It is expressed as a percentage.
• Stability: Companies that pay dividends are often well-established and financially stable with a history of consistent earnings. They tend to be mature companies in stable industries like utilities, consumer staples, and finance, as opposed to rapidly growing tech startups that typically reinvest all their earnings back into the company.
• Declaration Date: On this date, the company’s board of directors announces the size of the dividend, the record date, and the payment date.
• Ex-Dividend Date: An investor must own the stock before this date to be eligible for the next dividend payment. If they buy on or after this date, they will not receive that specific dividend. 

Investors choose dividend stocks for the potential for both capital appreciation (the stock price going up) and regular income.

Dividend Formula

There are three common metrics used to measure the payout of dividends:

• Dividends Per Share (DPS): The dollar amount of dividends issued per share outstanding.
• Dividend Yield: The ratio between DPS and the latest closing share price of the issuer, expressed as a percentage.
• Dividend Payout Ratio: The proportion of a company’s net earnings paid out as dividends to compensate common and preferred shareholders.

The formulas for the dividend per share (DPS), dividend yield, and dividend payout ratio are shown below.