Loading the player...
A:

Dividends are corporate earnings that companies pass on to their shareholders. They can be in the form of cash payments, shares of stock, or other property. Dividends may be issued over various timeframes and payout rates.

There are a number of reasons why a corporation might choose to pass some of its earnings on as dividends, and several other reasons why it might prefer to reinvest all of its earnings back into the company.

Why Some Companies Choose to Issue Dividends

For a mature company with stable earnings that doesn't need to reinvest as much in itself, here's why issuing dividends can be a good idea.

  • Many investors like the steady income associated with dividends, so they will be more likely to buy that company's stock.
  • Investors also see a dividend payment as a sign of a company's strength and a sign that management has positive expectations for future earnings, which again makes the stock more attractive. A greater demand for a company's stock will increase its price.

Companies that pay dividends include Apple (AAPL), Microsoft (MSFT), Exxon Mobil (XOM), Wells Fargo (WFC), and Verizon (VZ).

Why Some Companies Choose Not to Pay Dividends With Their Profits

  • A company that is still growing rapidly usually won't pay dividends, because it wants to invest as much as possible into further growth.
  • Even a mature firm that believes it will do a better job of increasing its value (and therefore a better job of increasing its share price) by reinvesting its earnings will choose not to pay dividends. Companies that don't pay dividends might use the money to start a new project, acquire new assets, repurchase some of their shares or even buy out another company.
  • The choice to not pay dividends may be more beneficial to investors from a tax perspective. Non-qualified dividends are taxable to investors as ordinary income, which means an investor's tax rate on dividends is the same as his marginal tax rate. Marginal tax rates can be as high as 37% (as of 2018). For qualified dividends, the tax rate is either 0%, 15%, or 20%, depending on the marginal income tax bracket that the investor falls under. The capital gains on the sale of appreciated stock can have a lower, long-term capital gains tax rate (typically up to 20% as of 2018) if the investor has held the stock for more than a year.
  • Firms that choose to reinvest all of their earnings, instead of issuing dividends, may also be thinking about the high potential expense of issuing new stock. To avoid the risk of needing to raise money this way, they choose to keep all of their earnings.
  • A company may also choose not to pay dividends because the decision to start paying dividends or to increase an existing dividend payment is a serious one. A company that eliminates or reduces its existing dividend payment may be viewed unfavorably and its stock price may decrease.

Notable companies that historically have not paid dividends to shareholders include Facebook, Alphabet, Amazon, Biogen, and Tesla.

RELATED FAQS
  1. Can dividends be paid out monthly?

    Find out how stocks can pay dividends monthly and learn about the types of industries or companies that will most likely ... Read Answer >>
  2. Cash Dividends or Stock Dividends: Which is better?

    The purpose of dividends is to return wealth back to the shareholders of a company. There are two types of dividends: cash ... Read Answer >>
  3. The incentive to buy a stock without dividends

    While dividends are the only direct income for shareholders, stocks that do not pay dividends prefer to create value in other ... Read Answer >>
Related Articles
  1. Investing

    Why Dividends Matter To Investors

    There is much evidence as to why dividends matter for investors, profitability in the form of a dividend check can help investors sleep easily. Learn more.
  2. Investing

    Put Dividends to Work in Your Portfolio

    Find out how a company can put its profits directly into your hands.
  3. Investing

    How Dividends Affect Stock Prices

    Find out how dividends affect the underlying stock's price, the role of market psychology, and how to predict price changes after dividend declarations.
  4. Retirement

    How Reinvesting Dividends Pays in the Long Run

    Dividend reinvestment is one of the easiest ways to grow wealth and can increase your investment income over time.
  5. Investing

    AAPL: Apple Dividend Analysis

    Apple's dividend has had healthy growth ever since its 2012 reinstatement, thanks to Apple's continuously rising revenue, earnings and operating cash flow.
  6. Investing

    How And Why Do Companies Pay Dividends?

    If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments ...
  7. Investing

    How Dividend Reinvestment Grows Your Money Faster

    Dividend reinvestment is a smart strategy for growing your investments faster over the long term, but it’s not a get-rich-quick proposition.
  8. Investing

    3 Dividend Trends in the S&P 500 Index (TSN, LUV)

    Analyzing recent financial performance of companies demonstrating an inclination to issue consistent dividends to shareholders on a quarterly basis.
  9. Investing

    Dividend Yield For The Downturn

    High-dividend stocks make excellent bear market investments, but the payouts aren't a sure thing.
RELATED TERMS
  1. Forward Dividend Yield

    A forward dividend yield is an estimation of a year's dividend ...
  2. Dividend Policy

    Dividend policy structures the dividend payout a company distributes ...
  3. Gross Dividends

    Gross dividends are the sum total of all dividends received, ...
  4. Property Dividend

    A property dividend is an alternative to cash or stock dividends. ...
  5. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  6. Income Investment Company

    An income investment company manages portfolios of income-generating ...
Trading Center