Why do companies pay dividends?

[RonPaulLiberty]

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?

 

[zzzz]

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.

 

[Toro]

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.

This is the right answer.

 

[uscitizen]

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.

Pretty much and a nice tax advantage for it as well I think.

 

[usmcstinger]

If you did some research, you would not have asked the questions.
Economics 101.

 

[Middleoftheroad]

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.

This is the right answer.

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.

 

[CrusaderFrank]

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.

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

 

[Toro]

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.

This is the right answer.

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.

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.

 

[Cuyo]

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?

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

 

[CrusaderFrank]

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

 

[Cecilie1200]

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.

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

Well, shareholders don't always agree with the CEO and BoD, or even with each other, as to what the best use of company money is.

 

[CrusaderFrank]

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.

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

Well, shareholders don't always agree with the CEO and BoD, or even with each other, as to what the best use of company money is.

Right, agreed.

Just look at the CEO of the Federal government

 

[RonPaulLiberty]

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.

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

I thought the 1st answer was right but the second one sounds right too.

Also, aren't shareholders already profiting from the rise of the stock price? if you issue dividends, doesn't it take away opportunities for the company to increase the stock price?

 

[Middleoftheroad]

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.

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

I thought the 1st answer was right but the second one sounds right too.

Also, aren't shareholders already profiting from the rise of the stock price? if you issue dividends, doesn't it take away opportunities for the company to increase the stock price?

It doesn't really take away an opportunity to increase the stock price, unless you are thinking of something I can't. It should immediately increase the price of the stock, as now people are being paid to own it. Further, many companies grow mainly on debt (I don't know how many), such as the company I work for. The debt payment is actually charged back to the location over time. The thoery behind it is something like this, if the new location can make enough money to cover the debt payment, then they are basically getting the location for free. I.E. free growth.

 

[newpolitics]

Dividends are issued first to those with preferred stock, as opposed to common stock, and which are usually only issued while a company is still pre-public. Therefore, it is usually only paid to certain stockholders who paid a higher premium on their initial purchase of the stock, and as such, a higher return would be expected, otherwise there is no incentive to buy preferred stock. Please correct me if I am wrong. I just did a little reading on this combined with old college learning in economics.

 

[jillian]

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

Well, shareholders don't always agree with the CEO and BoD, or even with each other, as to what the best use of company money is.

Right, agreed.

Just look at the CEO of the Federal government

The gOvernment is not a business. It has other obligations

Maybe that explains your confusion as to what government can and cannot do?

 

[niteowl]

Corporate taxes are based on retained earnings; that is, profits from this year, that you carry forward into the following year. Since you're going to pay dividends on those earnings anyway, it makes sense to pay the dividends before taxes are taken out.

 

[Sallow]

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.

Exactly.

That..and it encourages future investment.

 

[Sallow]

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?

Shareholders are effectively the owners of the company, so in a way, those profits belong to them. In this way, dividends provide small and easy pay-outs to stock owners. The truth is, this can benefit not just professional stock brokers, but even everyday working people who pick the right stocks.

Not exactly.

Most shareholders have little say in the direction the company takes. And it's not a "buy out" more then it is a share of the profit.

 

[Sallow]

Corporate taxes are based on retained earnings; that is, profits from this year, that you carry forward into the following year. Since you're going to pay dividends on those earnings anyway, it makes sense to pay the dividends before taxes are taken out.

Bullseye.