Dividends made simple

For many investors, dividends are one of the most appealing parts of owning shares. They provide money in your pocket without having to sell your investment. But what exactly are dividends, how do they work, and how can you make the most of them?

What are dividends?

A dividend is a payment made by a company or trust to its shareholders, usually drawn from profits. Think of it as a thank-you gift from the business for investing in them. When a company does well, instead of reinvesting all its earnings back into growth, it may choose to distribute some of those profits to its owners – that’s you, the shareholder.

Not all companies pay dividends, though. High-growth businesses often prefer to reinvest profits into expansion. But many established firms, as well as investment trusts, aim to pay dividends regularly as part of their shareholder return.

When are dividends paid?

Most companies pay dividends quarterly, though the timing and amount can vary. Importantly, some investment trusts and corporations can hold back a portion of income in stronger years to create reserves. This allows them to smooth dividend payments over time, continuing to pay shareholders even during more challenging periods.

This smoothing ability is one reason many investors value investment trusts. It means they can offer a steadier income stream than companies whose payouts fluctuate with profits.

How can you use your dividends?

Dividends are flexible, and how you use them depends on your goals:

• Withdraw as income. You can take dividends as cash, using them to supplement your salary, cover living expenses, or simply enjoy a little extra financial freedom.
• Reinvest automatically. Some investors reinvest dividends by purchasing more shares of the same company or trust. This increases their ownership stake and allows future dividends to be calculated on a larger base.
• Invest elsewhere. Dividends can also be redirected into other investments, broadening your portfolio and diversification.

Reinvesting has the potential to have a significant effect over time, as reinvested dividends compound. This means your dividends can generate more dividends, and so on. This snowball effect could make a big difference to long-term returns.

Why dividends matter

Dividends are more than just a nice bonus. They can provide:

• Income stability. Especially valuable for retirees or anyone looking for a more regular cash flow.
• Flexibility. You decide whether to spend or reinvest.
• Compounding power. Reinvestment has the potential to boost your portfolio growth over decades.

For many investors, dividends are a good way to find that comfortable sweet spot between predictable income and growth.

The bottom line

Dividends - or dividend increases - aren’t always guaranteed. But they can play a useful role in long-term investing. Whether you take them as income, reinvest them for growth, or a mix of both, they give you options for tailoring your portfolio to your goals.

At Alliance Witan, dividends are a central part of our approach. We’ve even increased our dividend payments every year for the last 58 - offering shareholders a flexible and consistent foundation for their portfolio.

Issued by Towers Watson Investment Management Limited (TWIM), registered office Watson House, London Road, Reigate, Surrey RH2 9PQ. TWIM is authorised and regulated by the Financial Conduct Authority, firm reference number 446740. TWIM is the Alternative Investment Fund Manager (AIFM) for Alliance Witan PLC. TWIM is part of Willis Towers Watson.
Alliance Witan PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office, River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Witan PLC gives no financial or investment advice. © Copyright Alliance Witan PLC. Tel: 01382 938320.
 
This information is for informational purposes only and should not be considered investment advice. The views expressed are the opinion of TWIM and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as of end July 2025 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable but not guaranteed.