Why do Companies Pay Dividend

Imagine getting a check from a company stating that you are a part in their profits and the shares were held by your parents, every single year from the time you become an adult, who would not love such surprises every quarter of the year. As a company which makes a lot of profit can choose to do many things, one thing for sure to win the confidence and appreciate their loyalty of being associated with the company comes in form of dividend payouts.

Why does a company pay a dividend?

  • since the company makes good profits it may choose to expand its markets in new geographical areas, lease its space for rent, acquire smaller and competitive businesses or simply invest in real estate, bonds or other financial institutions, buy shares or simply keep the cash in hand and show in its financials, if the board of directors feels none of the options would work they will definitely roll over the profits as Dividend to their shareholders
  • companies which are paying dividend regularly should have a strong business model in place to get the profits every year to be distributed to the shareholders, it cannot just pay for a year and then stop, which is a sign of risk if they falter after a year of paying
  • investors are really attracted to companies which pay consistently high dividends year after year, retirees who have a fixed income rely on the quarterly dividend check from the companies they have invested a while ago
  • investors should be aware not to fall in the honey trap where company who may not be doing well financially suddenly announce the payment of dividend to attract new investors who may try to buy their stock which are priced high, though it is easy to spot such odd one out from the list of companies, investors should be wise and nor gullible to buy and hold non performing negative stocks
  • as investors the aim is to grow in terms of shares, money, dividend from the companies they have invested their hard-earned earnings, companies may not essentially pay dividend in a particular year as they may have other business plans to expand, reinvest in the business, acquire to build in and strengthen their foundations which makes the shareholders wonder and feel left out as it is not absolutely essential to pay dividends.

As companies pay a dividend, the board of directors feels it is the best way to utilize the profits of the company which was contributed initially by the shareholders, it is just the best way of returning back what the shareholders invested.