A dividend is something “extra” that you get for being an investor or shareholder. It comes from additional money a company has after its normal profits are tallied. When a company makes these extra profits, it has two choices: pay dividends to its investors or reinvest it back into the company.
If a company is young and on the move, it usually chooses to reinvest these profits. That’s because it still has a lot of potential to grow and grow quickly. These extra funds would help it do so.
On the other hand, when a company has already built a reputation, it typically uses the profits to pay dividends to its shareholders instead. Investors often interpret the choice to offer dividends as a sign of a company’s confidence in its business. Other investors specifically invest in dividend yielding stocks as a strategy. Even though the company may not be growing by leaps and bounds, it can still deliver top-notch value to its investors, hence, the dividend. For instance, a long-standing company like Johnson & Johnson (JNJ) might pay a dividend while a faster moving company like Google might choose to reinvest those funds.