Home     About Us    Contact Us     Contribute     Privacy
Investing
Stocks
Bonds
Mutual Funds
Biz
Credit
Career
College
Economics
Tax
More
 
 
Marketplace
Related Articles
Related Definitions
Related Categories
Tip of the Day

Tip of the Day Borrow No More Than 30% of Your Available Credit

Borrow No More Than 30% of Your Available Credit - You should borrow no more than 30% of your available credit each month if you wish to keep your credit...

read entire tip

Recently Added
Other Great Sites
 

Why Do Some Companies Pay Dividends?

Why Pay Dividends?
Date Added: July 19th, 2004

By Chris Stallman  |  E-mail

Why do some companies pay dividends and others don't?
-Jill K., Idaho

That's a great question, Jill.  As you probably know, investors can earn a return on their investment through either dividends or capital gains.  So it's important to know what affects dividends to get a sense of what kind of return you'll earn from a stock.

A company has an opportunity to pay its investors a dividend only after it has become profitable and can generate free cash flowFree cash flow is the amount of cash a company generates from minus its capital expenditures.  Basically, free cash flow is the amount of cash a company has left after it's made the necessary investments back into its business.

Free cash flow gives a company a lot of options.  They have the option of using this excess cash to either invest it back into their business or pay it out as dividends.  Sometimes companies will be trying to grow a new area of their business and they'll want to plow their cash back into the business because they think they could get a strong return on their investments.  Or sometimes companies won't have new areas to invest in and they feel that by paying a dividend, their shareholders can earn a better return on that cash than they can earn for them.  This is why you typically see low-growth companies paying high dividends.

It's important to note that just because a company is highly profitable, it doesn't mean it has the capability to pay out a big dividend.  Take Home Depot for example.  During the 1990's, Home Depot had a strong net income but they weren't generating much free cash flow because they opted to use most of their operating cash to build new stores and expand into new markets.

Some companies flat out hate paying dividends.  One example is Microsoft.  The company is sitting on about $30 billion in cash but hasn't found any suitable ways to put it to use.  Common thinking is that they should pay a larger dividend, but management isn't too keen on that because of the tax consequences.  When a company pays out a dividend, the investor has to pay taxes on it.  So dividends often aren't the best way to put your cash to use, unless you have no other option.

We hope this helped to answer your question.  Just remember: companies with strong free cash flow typically pay dividends when they feel it's the best use of the cash.  If there's a better opportunity out there, they'll reinvest it.

Discuss It!
1 2 3 >

Matt said:

You may want to reconsider your comments on Microsoft. This from investopedia: "The progression of Microsoft through its life cycle demonstrates the relationship between dividends and growth. When Bill Gates' brainchild was a high-flying growth company, it paid no dividends, but reinvested all earnings to fuel further growth. Eventually, this 800-pound software "gorilla" reached a point where it could no longer grow at the unprecedented rate it had maintained for so long. So, instead of rewarding shareholders through capital appreciation, the company began to use dividends and share buybacks as a way of keeping investors interested. The plan was announced in July 2004, nearly 18 years after the company's IPO. The cash distribution plan put nearly $75 billion worth of value into the pockets of investors through a new 8 cent quarterly dividend, a special $3 one-time dividend, and a $30 billion share buyback program spanning four years. In 2010, the company is still paying dividends of 1.8%"

replique montres said:

You could post on the samples for the blog. You may distribute it's priceless. Your blog critiquing should heighten your clicks.

www.replicaorologi4it.com said:

This is really what I was searching for. I am feeling joyful to came here.I would like to thank you for sharing such info with us,I like to advise you that Keep sharing such ideas in the future as well.

Apple service center in Mumbai said:

Great Post... Nice share for me, maybe nice for all reader of your post.. thanks

Broadcast audio equipments in india said:

Apple products are revered for its quality, precision and great design.

animal feeds said:

Guar protein offer a wide selection of products for your specific requirements.

free vpn service said:

This topic is something that I have been looking into for a while now and your insight is exceptional. Thanks for sharing this information.

buy youtube views said:

I have been curious about this topic and decided to do some research. Your article has some useful information. Do you have any more on this subject?

buy instagram likes said:

I have been exploring this topic for a some long time. You have offered great information in your post and some things I have not seen in other content I have read by my friends.

math assignment help online said:

The companies dividend means it is a share of company profits which is been distributed by company owner. Most of the companies look for overall investment strategies.

windows 10 pc said:

A company must pay its dividend if it gets more profit. The shareholders are equally responsible for the development of the company. If it is not able to give the dividend, it is OK. It is not a necessary factor if it does not get a profit.

sewa mobil said:

Nice article, thanks for the information. It's very complete information. I will bookmark for next reference.

Heart surgery in gurgaon and Organ transplant in gurgaon said:

Artemis Hospital, spread across 9 acres, is a 350 bed, state-of-the-art multi-speciality hospital located at Gurgaon, in the Capital Region, India.

Rd - Help Restoring Windows said:

I learnt about this stuff from playing football manager, ironically, but very good writeup, for clarification purposes.

alex2519 said:

<a href=http://yorklocksmith.com>locksmith toronto</a> <a href=http://localedmontonlocksmith.ca>locksmith edmonton</a> car key locksmith car keys locksmith locksmith car keys locksmith for car keys car key locksmiths lost keys for car locksmith lost car keys locksmith lost car key locksmith emergency car key locksmith locked keys in car locksmith key locksmith locksmith car key locksmith keys auto key locksmith locksmith auto keys http://yorklocksmith.com/ http://localedmontonlocksmith.ca

Ph D admission 2015 And MPhil admission in rajasthan said:

OPJS University has been established in the year 2013, by an Act (Act No. 19 of 2008) Act No.-16 of 2013, of the Rajasthan State Legislature and is approved under section 2(f) of UGC Act 1956 vested with the authority to award Degrees, Diplomas and Certificates.

alex said:

<a href="http://www.0544342878.com">????? ?????</a> ????? ????? ??? ???? ?? ????, ????? ?? ???? ????!???? ???? ???, ??? ???? ????? ????? ????? ???? ???? ????? — ?????.???????? ??, ??? ????, ???? ???? ?????? ??? — ??? ??? ????? ??? ???? ???? ????? ???! ???? ?? ?????? ??? ?? ????? ????? ??????, ?? ??? ????, ??? ??? ???? ?? ??? ???? ??! ?? ???? !!! ?????? ???% 10000000 ????? <a href="http://www.livuy.info">?????? ?????</a>

Best school in mahendergarh and residential school in rewari said:

Glad to visit your blog, I look forward to more good articles and I think we all like to thank so many good articles, blog to share with us.

Ben said:

This one helped me for a thesis which I am writing. Thank you for giving me another point of view on this difficult situation. Now I can easily complete my article. Thanks

my site said:

I am preparing a research paper and collecting information on this topic. Your post is one of the better that I have read. Thank you for putting this information into one post.

Most Popular Articles
Most Popular Definitions
 
Daily Definition

Definition of the Day Enhanced Index Fund

Enhanced Index Fund - an enhanced index fund is strategy term employed to outperform traditional indexing. The fund is aimed at an index (an indicator, representing the value of a security) but the fund is also attempting to boost returns by staying clear of the index in order to...

read entire definition

 
 

 

 

Home     About Us    Contact Us     Contribute     Sitemap

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Copyright © 2009 TeenAnalyst.com