A dividend is a payment a company makes to its shareholders out of its profits. It is usually paid in cash per share held and represents a share of the company's earnings distributed to the people who own it.
In one line: A dividend is a slice of a company's profit paid out to its shareholders, normally as cash per share.
How a dividend works
Dividends are declared by a company's board and taxed under HMRC rules outside tax wrappers. A dividend allowance of 500 GBP applies for 2026-27 (HMRC), with dividends above it taxed at rates depending on the holder's income band.
For example, an investor owning 1,000 shares paying a 5p dividend receives 50 GBP. Held inside an ISA this is tax-free; held directly it counts towards the 500 GBP allowance.
Companies are not obliged to pay dividends and can cut or suspend them, so dividend income is not guaranteed.
Dividends vs capital gains
A dividend is income paid while the shares are held and is taxed as dividend income. A capital gain is the profit made when shares are sold for more than they cost.
They use different allowances and rates, so the same investment can produce both income and a gain that are taxed separately.
Primary source: GOV.UK: Tax on dividends