What are dividends and how to work out the yield

What are dividends?

A dividend is the share of profit a company chooses to pay out to those who hold its shares². Instead of reinvesting all of the profit, the company hands a slice to shareholders, usually in cash and per share. If you hold 100 shares, you receive 100 times the dividend per share.

Not every company pays dividends. Mature companies with stable profits tend to distribute part of them; many growth companies prefer to reinvest everything. The dividend is decided by the company and can change from year to year.

How much will I receive: dividend income

The income calculation is simple:

Annual income = annual dividend per share × number of shares

With 100 shares paying €1.50 a year, you receive €150 gross a year. Our dividend calculator does this for you and also shows the monthly average and the amount net of tax.

Dividend yield

Dividend yield measures the dividend against the share price. It is the way to compare companies with different prices and dividends:

Dividend yield = annual dividend per share ÷ share price × 100

A €30 share paying €1.50 has a 5% yield (1.50 ÷ 30). The higher the yield, the greater the income relative to the price, but beware: a very high yield can come from a falling price and signal that the market doubts the dividend is sustainable.

Yield on cost

There is a second way to look at yield: against the price you paid, not the current price. It is called yield on cost:

Yield on cost = annual dividend per share ÷ purchase price × 100

If you bought the share at €25 and it pays €1.50, your yield on cost is 6% (1.50 ÷ 25), above the 5% for someone buying today at €30. Because your entry price was lower, you are earning a higher return on the money you invested. That is why long-term investors in companies that raise their dividend see their yield on cost climb over time.

How dividends are taxed in Portugal

Dividends paid to a Portuguese resident are subject to a 28% withholding at source (the flat rate of Art. 71 of the Personal Income Tax Code)¹. In practice, you receive the dividend already net of that tax, and the withholding is normally the final tax, so there is nothing else to do on your return.

Out of the €150 gross in the example, €108 is left net (150 less the €42 of tax).

You can instead opt for aggregation: add the dividends to your other income and tax them at the progressive IRS rates. That option can help at lower incomes, where the marginal rate is below 28%. Dividends from foreign companies may also be withheld in the source country, with a double-taxation credit under the treaties; those cases are more complex and not covered by the calculator.

Taxing the sale of the shares is a separate matter: that involves capital gains, which you can estimate in the capital gains calculator.

Reinvesting dividends

Reinvesting dividends, rather than spending them, speeds up the growth of your portfolio through compound interest: the dividends buy more shares, which in turn pay more dividends. You can see that effect over time in the compound interest calculator.

In summary

Dividends are a form of income for those who invest in shares. To assess them, look at the total income, the yield against the price and the sustainability of the dividend, and do not forget the 28% withholding. Run your own numbers in the dividend calculator: enter the shares, the dividend and the prices, and see the gross income, the net income and the yield.