Why give dividends?

Discussion in 'Trading' started by switze22, Feb 4, 2008.

  1. If dividends take away a companies money to invest in themselves and grow further, why are they given?

    People really would rather take dividends then have a more profitable company?
  2. Growth does not necessarily mean growth in profitability.

    Some companies are too large to really grow by any significant amount. GE and Microsoft come to mind.

    There are also investors that are looking for income while having the chance at having some growth. It's the best of both worlds. If the dividend is high enough it can prop up the stock price and provide less downside risk.
  3. Companies that pay out dividends, assuming all other factors are equal, are generally valued higher than companies that do not pay out dividends.
  4. Yeah, listed companies are supposed to maximize shareholder value, if they can meet all their investment/spending needs and still have cash on hand it makes sense to buy back shares or pay a dividend... or, if you're MSFT, offer a ridiculous price for Yahoo :D
  5. Stocks are claims on the cash flows generated by a corporation. The market value of a company is the present value of all expected future cash flows that company will provide to its shareholders.

    If a corporation never returns cash to its shareholders, through dividends, share repurchases, or being acquired in a cash deal, then its stock is worthless -- no matter how much "profit" or "capital gains" are temporarily assigned to it by hopeful market participants.

  6. Founders of a company and their relatives or heirs may own or control a large block of stock. They must retain the stock to retain control. One way to extract cash from the company (without selling stock) is to propose and vote that the company pay dividends.
  7. Daal


    I'm not so sure. the threat of hostile takeovers, chance of future change in management(or management philosophy regarding returning capital) should make these capital gains possible and sustainable
  8. That's precisely my point: companies only derive value from the probability that they will deliver future cash flows to investors.

    You can make an argument for a company postponing dividends or share buybacks, but the fact that all companies will eventually pay dividends or buy back shares is the underlying assumption behind a nonzero stock price.

    The entire stock market cannot be supported by the possibility of all cash acquisitions. Acquisitions are limited by antitrust laws, so eventually the acquiring companies have to start returning value to shareholders.

  9. eagle


    Dividend is a proof of the reward for a company that you have invested. A kind of to show you that you can continue to trust the company. A company who can regularly pay dividends in good and in bad time proved to be steadily strong. Any way, investing in that kind of company is for widows and orphans. Most of us is looking for high growth and crushed. Crushed!!!!! yes if we are too slow to get out when there's a fire.
  10. A dividend is hard evidence that the company is actually making money. It's impossible to fake them for any length of time. Otherwise you can get a scenario like Enron. If you want to keep your money in the company, just reinvest the dividends.
    #10     Feb 5, 2008