Companies pay dividends to attract investors who want to share in the company's profits.
What Are Dividends?
Dividends are payments made to shareholders of a company. These payments are a shared portion of the profits the company's board of directors has voted to pay for the dividend period. Investors who own the company stock on the ex-dividend date are eligible to receive the dividend payment based on the number of shares they own. Companies pay dividends on a per share basis.
For example, XYZ company may pay a quarterly dividend of $1.25 per share. That means that an investor with 100 shares will get a dividend payment of $125 for the quarter in question. Most companies maintain a stable dividend rate. If that's true of XYZ company in our example, shareholders would earn a total of $5.00 per share in dividends throughout the year (=$1.25 x 4).
Dividend Yield
The dividend yield is a ratio presented as a percentage. It is the percentage of the price of a share that is currently being paid out in dividends, stated on an annual basis. For example, if a company pays a $1.25 dividend per quarter and has a recent stock price of $80, the dividend yield is 6.25%.
Why Some Companies Pay Dividends
Investors buy shares of companies effectively to participate in the profitability and value creation from those companies' businesses. Companies that pay dividends are essentially distributing some of that business value back to its owners.
Some companies do not pay dividends, leaving investors uncertain when they'll realize returns on an individual basis. Companies that regularly pay dividends provide investors greater certainty about how and when business profits will be returned to shareholders, which often makes their stock more attractive to investors. Dividend-paying companies tend to be viewed as financially strong because of their ability to remove money from the corporation and pay it to investors.
Let's take a deeper look at why some companies choose to pay dividends.
1. To Attract More Investors
Dividend-paying stocks tend to attract investors seeking income from their investments. There is a type of investor who buys and holds stocks using the dividends as income. These investors look for companies paying large dividends as a key indicator for purchase.
2. To Share Profits
Shareholders are equity owners of the company. One becomes a shareholder when they purchase shares of stock. Dividends are ways for these owners to participate in the profits. Companies that pay dividends are often well-established firms and viewed as more stable than growing companies who aren't in a position to return capital to shareholders.
Large Companies That Pay Dividends
Many of the largest stocks offer dividends, including:
- Apple (AAPL)
- Microsoft (MSFT)
- Johnson & Johnson (JNJ)
- Bank of America (BAC)
- Exxon (XOM)
Why Some Companies Do Not Pay Dividends
Not all companies pay dividends. Some companies are not profitable and require as much financing as possible to grow and pursue profitability. Other companies may be profitable but still preferable to growth pursuits as opposed to returning cash to shareholders as dividends.
Companies that do not pay dividends are by no means necessarily less appealing investment options. Some companies in a high growth phase may see their stock rise in price in much greater % terms than a more mature company could ever pay in dividend yield. Investors in these sort of companies can earn investing profits by selling their shares for capital gains.
In the United States, capital gains within a taxable account are subject to either short-term capital gains tax, or long-term capital gains tax. Dividends are also subject to taxes if they are received within a taxable account. Ordinary dividends are treated as income while qualified dividends are treated as capital gains.
Large Companies That Don’t Pay Dividends
Some of the largest companies that currently don’t pay dividends include:
- Amazon (AMZN)
- Alphabet (GOOGL) (GOOG)
- Berkshire Hathaway (BRK.B)
- Meta Platforms (META)
How Frequently Do Companies Pay Dividends?
Most companies pay dividends quarterly. This is the most common dividend schedule in the market. However, some companies may choose to pay dividends annually, semi-annually or monthly. The board of directors votes on when dividends will be paid and how much the dividend will be.
Key Dividend Dates
There are several key dates regarding dividends:
Declaration Date: This is the date an upcoming dividend payment is announced.
Record Date: This is the market day on which the company will check their records to see who is eligible to receive the dividend.
Ex-Dividend Date: Investors must purchase stock before the ex-dividend date to be eligible to receive the dividend. The Ex-Dividend date is normally 1 business day prior to the record date. Any new purchases of the stock on the ex-dividend date (or later) will not receive the dividend.
Payment Date: This is the date on which eligible shareholders can expect to receive the dividend in their accounts.
Important: In the United States and Canada, stock settlements occur 2 days (T+2) after the transaction has taken place. For example, if an investor purchases a stock on Monday May 3, they will be deemed the owner on record as of Wendesday May 5, with the ex-dividend date landing on Tuesday May 4.
What Can Shareholders Do with Dividends Paid?
There are a couple of ways that an investor can receive their dividends.
- Cash dividend: Shareholders receive the dividends as a cash payment crediting their account. Investors can then use these funds to purchase new investments.
- Stock dividend: Shareholders receive an equivalent number of new shares (of the same company) representing the $ value of the dividend. For instance, if an investor has 1000 shares of a $40 stock, and that stock pays a $0.80 dividend, the $800 total dividend value will earn the investor 20 new shares.
Tip: Companies occasionally issue mandatory stock dividends, without the option for a cash dividend. In other cases, investors can subscribe to a Dividend Reinvestment Plan (DRIP), which allow them to request that dividends be paid in shares as opposed to cash. DRIPs can be administered by the underlying company, or by an investors' broker.
How To Know If a Company Pays Dividends
Most stock brokerages offer ways for investors to screen stocks, looking for investments that offer dividends. Investors may also seek out this information in the company’s annual report or through the Security and Exchange Commission’s (SEC) website using the EDGAR research tool.
Seeking Alpha users can see a company's dividend rate and dividend % yield on a stock's quote page. If these values are $0.00 and 0%, it suggests that this stock doesn't pay a dividend.
How Much Do Companies Pay In Dividends?
How much a company pays in dividends varies widely. Because dividends are usually contingent on profits, the more profitable a company is, the more it will potentially pay in dividends. Remember that the board of directors does vote on the size of a dividend before the dividend announcement is made. Most companies do not pay out their full earnings as dividends, electing to retain some of the earnings profits within the company.
How Companies Pay Dividends
Companies pay cash dividends from their treasury. The aggregate cost of the dividend will reduce a company's cash on hand. For instance, if company ABC had $65 million of cash, and then paid a $3.00 dividend on their 5 million shares outstanding, the company's cash balance would decrease from $65 million to $50 million.
Investors studying the financial statements for companies will see the cost of dividends deducted in the Cash Flow From Financing Activities section of the Cash Flow Statement.
What Are Share Buybacks?
Share buybacks are also called share repurchases. This reflects when a company buys its own shares from the market, sometimes in lieu of paying a dividend. Companies that perform share buybacks may see this as the best use of capital for that time period, and doing so frequently increases share value.
After a share buyback has been conducted, each share of common stock represents a higher percentage ownership of the company (and future earnings) than previous.
Should You Invest In Companies That Pay Dividends?
Dividend stocks tend to appeal to investors who are seeking income from their investment holdings. If a given individual requires income from their investments to fund regular expenses such as rent, utilities or medicine, growth stocks that do not pay dividends are unlikely to appeal to them.
There are no guarantees that dividend-paying companies will not reduce or eliminate them. Banks famously slashed or eliminated their dividends during the financial crisis, while many energy stocks did the same during periods when oil and natural gas prices plummeted. Investors should carefully assess the potential risks of any investment they make.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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