When a company is profitable, it must decide how best to use its earnings. Some choose to keep the earnings and reinvest them in the company. Others distribute the earnings, or a portion of them, to stockholders as a dividend. The company can benefit from a dividend payout in several ways. Dividends allow stockholders to profit from the stock without having to sell it, which can make the stock more attractive to investors. Also, many see the ability to pay a dividend as an indicator of a company's strength and stability.

Dividends are usually cash, but can also take the form of stock shares or property. The company’s board of directors determines the amount of the dividend. Investors frequently check a stock's dividend yield, which tells what percentage of the share price the dividend represents. For example, if a stock has a yield of 5 percent, stockholders are earning a yearly dividend worth 5 percent of the share price for each share they own. If the company's profits continue to grow, the board of directors may choose to share with investors by increasing the dividend. Again, this can indicate that a company is growing stronger. Most companies are loathe to decrease the dividend, since this can be taken as a sign that the company is experiencing problems and may cause the stock price to fall.