a dividend is a cash distribution by a company to its shareholders let’s look at Al’s ice cream shop to open his first shop al gathers money from investors in issue shares Al’s ice cream is a hit and sales skyrocket al uses the company’s profits to open up more and more shops sue now reaches the point where his ice cream shops are competing with each other for sales this is known as market saturation instead of opening more shops I’ll decided to focus on keeping sales strong at his existing shops profits continue to roll in al now has the choice between investing his profits or simply paying them out to the shareholders owl knows he can sell ice cream he’s not sure he can make a profit investing so he decides to pay out some of his profits directly to the shareholders he holds back some profits in case of an emergency and pays out all the cash he doesn’t need to run his business this cash is a dividend it can be increased or decreased yearly according to how Al’s business performs