Often times, a company will reward its shareholders by paying out a portion of its profits in the form of a dividend rather than retaining those earnings for investment in the company. For publicly traded companies, dividends are usually paid on a fixed schedule (monthly, quarterly, semi-annually and annually) and the total amount you receive is based on the number of shares you own prior to the record date. Furthermore, the dividend can be paid in cash or re-invested back into the company through a Dividend Re-Investment Plan (DRIP) — sometimes at a discount to the current stock price if the company offers that kind of plan (otherwise, your brokerage will just make an open-market purchase using the cash you received).

In certain cases, a company may choose to pay a stock dividend, i.e. instead of cash some or all of the dividend may be paid by issuing new shares. This allows the company to hold onto its cash, but depending on the tax characteristics of the dividend shareholders may owe taxes to the government on that income, even though no actual cash was received. During the height of the financial crisis, many Real Estate Investment Trusts (REITs) and Business Development Companies (BDCs) made dividend payments in stock rather than cash, because both of those types of companies are required to pay out most of their earnings to shareholders in the form of dividends.

Dividends are also important in valuing a company's stock. Finance professor Myron Gordon popularized an approach known as the ''Dividend Discount Model'' in his book ''The Investment, Financing and Valuation of the Corporation.'' This approach looks at the current dividend and expected future dividends anticipated to be paid in the future, and combines the current value of all that combined cash. Because a dollar in hand today is worth more than a future dollar (things tend to cost more in the future on account of inflation), the future expected payments are ''discounted'' in the calculation (hence the term Dividend Discount Model).