Generally, companies are not obliged to pay dividends. It is within the discretion of the company to determine whether or not payment of dividends is suitable. Here is a helpful tip for those who don’t know what dividends are. Dividends are corporate earnings that are usually paid to shareholders. Company owners have confirmed that paying dividends offers a lot of benefits to both the shareholder and the company. Here are a few pieces of information on reasons why these companies pay dividends.
First, companies pay dividends because they have earned so much in a fiscal year. In other words, they enjoy financial abundance, which makes them pay their shareholders a part of their earnings. This is very common to big and giant companies like Apple, Wells Fargo, JP Morgan Chase, etc. On the other hand, it may be difficult for small businesses or start-ups to pay dividends. This is because they always want to reinvest their earnings.
Again, companies pay dividends to attract more investors. This is done with a promise that the investors will enjoy more benefits. There is no doubt that many investors love to extend their streams of income to receiving dividends. So, when they constantly receive their dividend payments, they are encouraged to invest more money in the company.
Furthermore, companies pay dividends to portray their financial well-being in a good light. When a company consistently pays dividends to its investors, it shows that the company has the financial strength to keep paying. There are even times that some of these companies run into financial hardships. But when they keep paying their dividends, it communicates positivity despite the harsh financial conditions.
However, where a viable and big company with a consistent history of dividend payments suddenly stops payments, it shows pessimism and financial downturn. This will chase prospective investors away. It is worthy to note that companies that pay dividends turn out to be the most viable. They are also gradually becoming blue-chip companies.
In conclusion, there is no doubt that dividends are beneficial to both investors and the company. Dividends serve different purposes to both sides of the divide. So, it is advised that companies reach a consensus with their investors to determine whether or not to pay dividends or to reinvest. This will further strengthen the trust in their business relationship.