Why Do Companies Pay Dividends?
Some companies choose to reward shareholders, the owners of the company, with payments of cash, property or stock. These can be paid on a regular schedule, such as quarterly dividends, or as special, one-time occurrences. Companies have a number of reasons for paying out dividends.
Other People Are Reading
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Paying Shareholders
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Shareholders generally invest for the purpose of making money. Dividends are an opportunity for shareholders to earn a return on their investment even if the price of the stock falls, so it makes the stock more desirable.
Showing Stability
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When companies maintain a record of consistently paying dividends, investors see the company as a less risky investment.
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Increasing Demand for the Stock
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Over time, stocks that pay dividends are more profitable than firms, and even in a recession, the stock price does not drop as much because investors are still making money.
Disbursing Excess Cash
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Some companies have matured to the point where there is minimal room for capital reinvestment. Rather than hold large cash reserves, the companies pay the cash out as a dividend.
Name Recognition
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When a company announces a dividend, publications that cover the stock market or businesses publicize the news to prospective investors.
Dividend Reinvestment Plans
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Dividend reinvestment plans (DRIPs) allow investors to automatically use dividend payments to buy more shares of the company, often without paying fees.
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