Portion of company profits are divided and paid to shareholders per share owned.
The mechanics of dividends
Companies announce to the market when they intend to pay a dividend, and how much that dividend will be. Generally they' will also send a letter to shareholders with this dividend information. This is often referred to as 'declaring a dividend'.
As part of its dividend announcement, the company will state the 'ex dividend' date. In order to receive the dividend, you must own the shares on the ex-dividend date - practically, this means you need to have purchased the shares before the ex-dividend date.
On the ex-dividend date, the company's share price will often fall by approximately the amount of the dividend, to reflect that buyers from that date onward will not be eligible to receive that particular dividend.
The payment date is, as the name suggests, the date the company pays the dividend to shareholders. The payment date is usually some time after the ex-dividend date, often between 4 and 8 weeks.
In Australia, dividends often come with bonus tax credits, called franking (or imputation) credits. Dividends are paid out of company profits, and franking credits represent the company tax that has already been paid on those profits.
For Australian investors, franking credits have the effect of potentially reducing the investor's taxable income. This is because franking credits represent tax already paid on the dividend (by the company, at the company tax rate).
Investors on a low marginal tax rate may even be able to claim a refund on part or all of the franking credits they receive, and thus receive money back from the Australian Taxation Office at tax time.
Dividend Reinvestment Plans (DRPs)
Some companies give shareholders the option to reinvest dividends in the form of additional shares in the company, rather than in cash. This is known as a dividend reinvestment plan (DRP). Sometimes DRP shares will be offered at a discount to the prevailing market price, to encourage shareholders to continually re-invest in the company.