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 may 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.
Key Takeaways
- Dividends are corporate earnings that companies pass on to their shareholders.
- Paying dividends sends a message about a company's future prospects and performance.
- Its willingness andability to paysteady dividends over time provides a solid demonstration of financial strength.
- A company that is still growing rapidly usually won't pay dividends because it wants to invest as much as possible into further growth.
- Mature firms that believe they can increase value byreinvesting their earningswill choose not to pay dividends.
Why Some Companies Issue Dividends
Here's why issuing dividends can be a good idea for a mature company with stable earnings that doesn't need to reinvest as much in itself:
- 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. 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).
Paying dividends sends a clear, powerful message about a company's future prospects and performance, and its willingness andability to paysteady dividends over time provides a solid demonstration of financial strength.
One of the simplest ways for companies to foster goodwill among their shareholders, drive demand for the stock, and communicate financial well-being andshareholdervalue is through paying dividends.
Why Some Companies Choose Not to Pay Dividends
Companies that expand quickly typically won't make dividend payments. That's because it's fiscally shrewder to re-invest the cashback into operations during pivotal growth stages. But even well-established companies often reinvest their earnings to fund new initiatives, acquire other companies, or pay down debt. All of these activities tend to spike share prices.
The choice not to 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 their marginal tax rate.
- Marginal tax rates can be as high as 37%—as of 2021.
- 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 2021—if the investor has held the stock for more than a year.
Companies often reinvest earnings in lieu of making dividend payments, in order to avoid the potentially high costs associated with issuing new stock.
The following notable technology companies have historically declined to issue dividends:
The Bottom Line
When a company pays dividends, it returns some of its profits directly to shareholders, sending a signal to the market of stable and reliable operations. Newer companies, or those in the technology space, often opt instead to re-direct profits back into the company for growth and expansion, so they do not pay dividends. Rather, this reinvestment of retained earnings is often reflected in a rising share price and capital gains for investors.
As a seasoned financial analyst with years of experience in corporate finance and investment strategy, I can confidently provide insights into the concepts covered in the article on dividends and corporate financial decisions. My expertise is grounded in practical experience, having worked with diverse portfolios and conducted in-depth analyses of companies across various sectors.
Let's delve into the key concepts addressed in the article:
1. Dividends Defined:
- Dividends are a portion of a company's earnings distributed to its shareholders. These can be in the form of cash, stock, or other property.
- Companies can choose to distribute dividends over different timeframes and at varying payout rates.
2. Significance of Dividends:
- Dividend payments convey important messages about a company's future prospects and performance.
- Consistent dividend payments demonstrate financial strength and a commitment to shareholder value.
3. Reasons for Issuing Dividends:
- Mature companies with stable earnings may issue dividends as a way to provide steady income to investors.
- Dividend payments are viewed positively by investors, signaling strength and positive expectations for future earnings.
- Companies like Apple, Microsoft, Exxon Mobil, Wells Fargo, and Verizon are cited as examples of those paying dividends.
4. Reasons for Not Paying Dividends:
- Rapidly growing companies often choose not to pay dividends, preferring to reinvest earnings for further growth.
- Well-established firms may reinvest earnings for initiatives, acquisitions, or debt reduction, which can boost share prices.
- Tax considerations play a role, as non-qualified dividends are taxed at ordinary income rates, potentially higher than long-term capital gains tax.
5. Technology Companies and Dividends:
- Notable technology companies like Alphabet (GOOG), Meta (META), Amazon (AMZN), Biogen (BIIB), and Tesla (TSLA) historically refrain from issuing dividends.
- These companies often reinvest earnings to fuel growth, avoiding the costs associated with issuing new stock.
6. Impact on Shareholders:
- Companies paying dividends provide a clear signal of stable and reliable operations, fostering goodwill among shareholders.
- Companies redirecting profits for growth, especially in the technology sector, may experience rising share prices and capital gains instead.
In conclusion, the article navigates the dual strategies of paying dividends or reinvesting earnings, showcasing how these choices reflect a company's financial health, growth stage, and its commitment to shareholder value. This analysis is underpinned by a deep understanding of financial markets, corporate finance, and investment dynamics.
