Importance of Dividends

Publicly held companies sell stock to large and individual investors to provide equity funding for their business operations. These companies may decide to pay dividends to shareholders, which are payments made from monthly or quarterly earnings. Dividends play an important role in the investing world.

Purpose

Shareholders invest in a company to earn a financial return from the company's operations. While companies are not required to pay out dividends (although preferred stock always pays dividends), these payments represent a willingness to return a portion of the company's earning to individuals backing the company's operations.

Types

Dividends can be made by the company using cash or additional stock certificates. While many companies send shareholders a check for dividend payments, stock dividends can occur when the company gives one share of stock for every 10 shares owned by the investor.

Significance

Companies who pay dividends indicate that they have moved into a business stage where retaining all capital earned is not necessary. Paying out dividends can help the company generate interest from other individuals willing to invest into the company and receive these payments.

References

• Investopedia: Why Dividends Matter