# Why do companies pay dividends?



## RonPaulLiberty (Feb 29, 2012)

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?


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## zzzz (Feb 29, 2012)

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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## Toro (Feb 29, 2012)

zzzz said:


> 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.


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## uscitizen (Feb 29, 2012)

zzzz said:


> 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.


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## usmcstinger (Feb 29, 2012)

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


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## Middleoftheroad (Mar 2, 2012)

Toro said:


> zzzz said:
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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.


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## CrusaderFrank (Mar 2, 2012)

zzzz said:


> 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


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## Toro (Mar 2, 2012)

Middleoftheroad said:


> Toro said:
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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.


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## Cuyo (Mar 2, 2012)

RonPaulLiberty said:


> 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.


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## CrusaderFrank (Mar 2, 2012)

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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## Cecilie1200 (Mar 4, 2012)

CrusaderFrank said:


> zzzz said:
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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.


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## CrusaderFrank (Mar 4, 2012)

Cecilie1200 said:


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Right, agreed.

Just look at the CEO of the Federal government


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## RonPaulLiberty (Mar 8, 2012)

CrusaderFrank said:


> zzzz said:
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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?


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## Middleoftheroad (Mar 9, 2012)

RonPaulLiberty said:


> CrusaderFrank said:
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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.


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## newpolitics (Mar 17, 2012)

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.


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## jillian (Mar 17, 2012)

CrusaderFrank said:


> Cecilie1200 said:
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The gOvernment is not a business. It has other obligations

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


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## niteowl (Mar 18, 2012)

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.


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## Sallow (Apr 2, 2012)

zzzz said:


> 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.


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## Sallow (Apr 2, 2012)

Alohafax said:


> RonPaulLiberty said:
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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?
> ...



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.


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## Sallow (Apr 2, 2012)

niteowl said:


> 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.


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## Sallow (Apr 2, 2012)

CrusaderFrank said:


> Cecilie1200 said:
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CEOs are not elected and have the ability to fire people who do not agree with them.


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## editec (Apr 2, 2012)

RonPaulLiberty said:


> 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?


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## fdsgrs (Apr 2, 2012)

Good point


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## ThinkCritically (Apr 13, 2012)

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


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## Mason (Jun 25, 2012)

zzzz said:


> 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) .


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## OohPooPahDoo (Aug 1, 2012)

RonPaulLiberty said:


> 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.


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## OohPooPahDoo (Aug 1, 2012)

zzzz said:


> 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.


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