A dividend is a payment made by a company to its shareholders from its profits. When you own shares in a company that pays dividends, you receive a regular cash payment — usually quarterly or twice a year — simply for holding those shares. Dividends are one of two ways investors make money from shares, the other being the rise in the share price over time.
How do dividends work?
When a company makes a profit, it can reinvest the money back into the business or distribute some of it to shareholders as a dividend. Companies that pay regular dividends tend to be large, established businesses in stable sectors — utilities, banking, consumer goods, and pharmaceuticals — with predictable earnings. The dividend is expressed as pence per share. If you hold 1,000 shares and a company pays a 10p dividend, you receive £100.
What is dividend yield?
The dividend yield is the annual dividend expressed as a percentage of the current share price — a useful way to compare income from different shares. A share priced at £10 paying a 50p annual dividend has a yield of 5%. A high yield can indicate good income — but can also signal the market expects the dividend to be cut, so always look at the underlying business health too.
Are dividends taxed in the UK?
Yes — dividend income above the annual dividend allowance is subject to dividend tax. For 2026/27, the dividend allowance is £500. Above this, dividend tax rates are 10.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers. However, dividends earned inside a Stocks and Shares ISA are completely tax-free — one of the most compelling reasons to use an ISA for income investing.
What is dividend reinvestment?
Instead of taking dividends as cash, many investors reinvest them — using the payment to buy more shares. Over time this creates compounding: you earn dividends on a growing number of shares, which generates more dividends, which buys more shares. Reinvesting dividends consistently is one of the most effective long-term wealth-building approaches available to investors.
Are dividends guaranteed?
No. Companies can reduce or cancel dividends at any time — particularly during difficult periods. During the Covid-19 pandemic, many large UK companies suspended their dividends entirely. This is why dividend investors typically hold a diversified portfolio across many companies and sectors rather than relying on any single stock.
Frequently asked questions
What is a dividend?
A dividend is a payment from a company to its shareholders, typically from profits. It’s one of two main ways investors make money from shares — the other being growth in the share price.
How often are dividends paid?
Most UK companies pay dividends twice a year — an interim and a final dividend. Some pay quarterly. The schedule varies by company and is announced in advance.
Do all shares pay dividends?
No. Many growth-focused companies — particularly in technology — pay no dividends, preferring to reinvest all profits. Dividend-paying shares tend to be in more mature, stable industries with predictable earnings.
How can I avoid paying tax on dividends?
Hold dividend-paying investments inside a Stocks and Shares ISA. All dividends received within an ISA are completely free from UK dividend tax, regardless of the amount.