How to explain dividends to kids

A dividend is a form of payment from the companies you invest in. These payments are sometimes made every three months (quarterly) in cash. The company’s leaders can choose whether to pay a dividend at all and how much to pay. 

Imagine you and your friend own a lemonade stand. After selling lemonade, you make a profit of $2. You split it evenly between the owners, so everyone gets $1. Sweet!

This is the same as a dividend, except a company on the stock market might have thousands or millions of different owners — each share gets an equal share in the profits. Sometimes, a company won’t make a profit or will choose to reinvest the profits into hiring employees or building a factory and won’t pay a dividend.

The same thing could happen at your lemonade stand. Instead of splitting the $2, you could invest in building a new stand at a different location or researching new flavors of lemonade (strawberry anyone?). The company’s CEO has a big decision to make about paying a dividend or reinvesting into the company.

Takeaway

A dividend is like a reward for your investment. You are getting something back from a company you own a part of. 

Refreshers

• Stocks
• Investments

Stocks

A stock is a little piece of a much bigger company. Imagine that a company is a castle made out of Legos. A stock is like one Lego piece in that castle: When you buy the stock, you own that piece of the company. 

Investments

An investment is something you can buy and hold with the hope that it will make you money. Like a seed, it needs time to grow into a tall tree or produce delicious fruit. But like plants, it's no guarantee that things will go as planned. Through diversification, buying a bunch of different things increases your chances of some of those "seeds" doing well, even if others don't.