What is a dividend? Simply explained

If you own stocks, you’re more than just an investor—you’re technically a co-owner of that company. And when the company performs well, you might receive a share of the profit. That share is called a dividend.

Dividends are payouts that listed companies make to reward their shareholders. They’re a common way to share profits and are especially popular with investors who prefer consistent returns. Whether you invest in individual shares or through index funds like ETFs, dividends can play a key role in your overall return.

So what exactly is a dividend, how does it work, and how does it apply when you invest using the Peaks app?

The different types of dividend payouts

Dividends aren’t always paid out in the same way. Companies and funds can distribute profits in several forms, depending on their strategy and structure. The payout can be made directly to your bank account, it may be issued in the form of additional shares, or it can be automatically reinvested.

• A cash dividend means money is directly deposited into your account.
• A stock dividend provides you with additional shares instead of cash. 
• Preferred dividends give priority to shareholders holding preferred stock.
• An interim dividend is a mid-year payment—less common in Europe.
• There are also monthly dividends, which are rare in Europe but more common in the US, and often used by investors who want a regular income stream.

Once the payout date arrives, the dividend is either paid out or reinvested, depending on the setup of your fund or investment platform.

What happens to the share price after a dividend?

After a dividend is paid, a company’s share price usually drops slightly. This is because there’s now less money in the company’s reserves, so its total value is marginally lower. This adjustment is normal and doesn’t signal a loss in value. You can learn more about this effect by reading about ex-dividend pricing.

Why some companies don’t pay dividends

Not all companies or funds pay dividends, and that’s not necessarily a sign of poor performance. Some fast-growing companies prefer to reinvest their profits into product development, market expansion or innovation. In these cases, profits go toward building future value rather than immediate returns. Company reinvestment strategies can strengthen long-term growth.

Why regular dividends are seen as a good sign

On the flip side, when a company pays dividends consistently over time, it’s often seen as a sign of financial stability. These firms typically operate in established industries and produce reliable profits. Investors who prefer lower volatility and long-term returns often seek out these types of stocks. Sectors like utilities, telecom, and consumer goods are frequent candidates for consistent dividend payments. You can explore different dividend investing strategies to see how this can fit into a diversified portfolio.

How does dividend work with Peaks?

When you invest with Peaks, you don’t buy individual shares—you invest in exchange-traded funds, or ETFs. These funds contain hundreds of shares or bonds, many of which pay dividends to the fund. Some of these ETFs distribute dividends directly to you as an investor, while others reinvest the payout automatically.

Four of the ETFs used in Peaks’ portfolios currently pay out dividends (the Peaks app automatically reinvests these on your behalf). These are:

• UBS MSCI USA Socially Responsible – pays in February and August, approximately 1% per year

• UBS MSCI Pacific Socially Responsible – pays in February and August, approximately 2% per year

• iShares Core Government Bond UCITS ETF EUR – pays in January and July, approximately 0.7% per year

• Xtrackers II ESG EUR Corporate Bond UCITS ETF – pays in April, but the amount can vary year to year

Bond funds tend to change over time as older bonds mature and new ones are added. That’s why the dividend amount from bond ETFs can fluctuate. To understand why this happens, check out this simple explanation of how bonds work.

All of Peaks’ readymade ETF portfolios include some combination of these funds, although the weighting depends on your selected risk level. The amount of dividend you receive will vary depending on your portfolio.

What happens to your dividends in the Peaks app?

When a fund in your portfolio pays a dividend, Peaks automatically reinvests that amount back into the same fund. This helps boost the long-term effect of your investment through compound growth. You can always check how much dividend you’ve received in the Peaks app. If you prefer to transfer it to your bank account instead, you can easily do so.

For a closer look at how reinvestment affects long-term outcomes, check out this article on the return-on-return effect.

Do I have to pay tax on dividends?

In most European countries, dividends (that are not reinvested) are treated as income from capital and are therefore subject to tax. The amount of tax you pay depends on where you live and your personal tax status. You can check current rules through your local tax authority or visit the EU’s guide to dividend tax rates.

Dividends can be a great way to earn income from your investments and build long-term value. With Peaks, you invest in diversified ETFs, some of which include companies with strong dividend histories. Dividends are reinvested automatically, so you don’t have to take any action. Thanks to the app’s clear dashboard, you can always see exactly how much you’ve earned.

Know that investing always involves risks. You may lose part or all of your investment. Peaks is an execution-only service and does not provide financial advice.