Why do companies pay dividends?

Discussion in 'Stock Market' started by RonPaulLiberty, Feb 29, 2012.

  1. RonPaulLiberty
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    RonPaulLiberty Rookie

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    I hear in the news Apple is sitting on a cash pile and that they want Apple to issue dividends but why would companies do that? How is that in their interest?
     
  2. zzzz
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    zzzz Just a regular American

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    Simplistic explanation:
    Shareholders are the owners of the company and they invest money in the company by buying shares of the company, stock. The board of directors or the people who run the company are elected by the shareholders to make the company profitable so share prices go up and dividends are returned to the shareholders. Shareholders expect a profit just like everyone else does when they invest their money.

    Companies that are holding on to large cash reserves are essentially withholding the profits they made from the investors. Not only that but with the low interest rates, that money is not making money sitting in the bank either.
     
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  3. Toro
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    Toro Diamond Member

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    This is the right answer.
     
  4. uscitizen
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    uscitizen Senior Member

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    Pretty much and a nice tax advantage for it as well I think.
     
  5. usmcstinger
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    usmcstinger Silver Member

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    If you did some research, you would not have asked the questions.
    Economics 101.
     
  6. Middleoftheroad
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    Middleoftheroad Active Member

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    Well kinda. It is also not a bad idea if they are using this money to grow their business into other areas ,gain market share, or pay down debt. All of these things would increase their stock price which would make money for their investers when it is time to sell.
    But just sitting on it is just stupid.

    Edit: there are also other reasons for sitting on cash for a company. Sometimes it helps with their balance sheet if they have a lot of debt etc... I haven't really looked much into them, so I can't say for sure and honestly I'm not going to bother.
     
    Last edited: Mar 2, 2012
  7. CrusaderFrank
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    CrusaderFrank Diamond Member

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    Um, no.

    Companies hold cash when they can put it to better use than distributing to the shareholders, and the shareholders should be happy about that
     
  8. Toro
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    Toro Diamond Member

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    Basically, his description is correct. But it's a capital allocation decision. In theory, a company should retain and reinvest the cash its business throws off if the company can reinvest it at a higher rate than shareholders can on their own, whether that is in new growth initiatives, buying companies, paying down debt, etc. If they cannot, then they should give it back to shareholders.

    Some companies like Apple hoard too much cash. Apple has $100 billion of cash on its balance sheet, which is insane. However, cash is the only thing that kept Apple alive when it was at risk of disappearing forever, so what might seem irrational on the surface may be more rational when you did deeper.
     
    Last edited: Mar 2, 2012
  9. Cuyo
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    Cuyo Training a Guineapig army

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    To attract investors, of course. One of many things to consider when deciding to, or not to, purchase a stock.
     
  10. CrusaderFrank
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    CrusaderFrank Diamond Member

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    All you have to do is go through one down cycle and nearly lose the business to see why you can almost never have too much cash
     

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