Why do companies pay dividends?

[Sallow]

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

CEOs are not elected and have the ability to fire people who do not agree with them.

 

[editec]

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?

Basically there's no single answer to that question.

It's in the interests of management if the majority stockholders WANT to take those dividents.

It might be in ther interests of the management if the stock prices are falling.

It really depends on the DETAILS of each stock at the time and the people who own the company.

Now honestly, is there really anyone here who doesn't already understand that?

 

[fdsgrs]

Good point

 

[ThinkCritically]

To put in layman terms....

You have lemonade stand...you make profits...you see more opportunities to make profits selling lemonade if you take your previous profits and invest it in more lemonade stands....thus making even more profits....you keep doing this until there aren't any more opportunities to make additional profits by expanding your business...Once there are not anymore opportunities to expand with your profits you just start keeping the profits instead of reinvesting them...This is called a dividend....This is why dividends are usually only given out by mature firms like Alcoa

 

[Mason]

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.

Great explanation,fully agree with you. An investor invest in something to get some return and that return is paid in the form of dividend to the investor (either as bonus share or cash dividend) .

 

[OohPooPahDoo]

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?

When shareholders think they can put the extra capital to better use than Apple can, they'll want dividends.

 

[OohPooPahDoo]

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.

They aren't withholding those profits at all - the investor is free to cash in on the profits by selling some or all of his shares. The money is still there. Its really an issue of how the capital is best deployed. There are also tax considerations - back when dividends were taxed as income, companies tended to not want to pay them. This allowed the investors to take their profit by selling some of their shares, paying the more favorable cap gains rate.