Economic grounds for paying dividends
Have you ever wondered why some companies pay dividends and others don’t? This post will answer that question. What is the economic grounds for paying dividends and a reality, that could have more to do with politics. The payment of dividends depends largely on the rates of return, that can be achived without risk on the market and, unfortunately, the company’s politics. What are economic grounds for paying dividends?
Is it worth to pay dividends
Of course, I will say that it, that all depends on your point of view. A dividend as part of distributable profit paid to shareholders is generally a welcome phenomenon by investors. They receive real money in addition to their shares. It is therefore no surprise, that real money in your account is what investors want to receive. It is known, that the share price can drop, and the money in the account is always money. On the other hand, often large shareholders with real power in a company have a number of methods by which they can not pay dividends, while still receiving the benefits of owning the shares themselves. There are really many ways in which the management can not pay dividends. However, this post is not about that.
What conditions must companies meet to pay dividends?
Thus, the first condition for corporations to pay dividends is, that they must have undistributed profit, as shown in the financial statements. Naturally, the profit category is more complicated. However, the effect of the good condition of the company is only an accounting record. It is of course not the amount of money owned by the company. But enough of this theory. Another condition must be the will of the company’s authorities, i.e. representatives of the largest shareholders, to pay the dividend.
The economic sense of paying dividends
Let’s start with what the company’s goal is. Not making money at all, as a lot of investors think. The goal is to increase the company’s value. What does this mean for the need to pay dividends? The answer is relatively simple. If the company shows profit for previous periods, it may increase the value of company or be paid to shareholders in the form of dividends. Leaving profit in the company makes sense, when it can be invested in some project in the company, that will bring a higher rate of return, than commonly obtained on the market. If the rate of return, that the company can achieve by investing this money inside the company is lower than the investment, that shareholders can achieve by investing, for example, in a deposit in bank, then the company’s authorities should pay out this money in the form of dividends. Only this and so much.
What is the reality
Of course, political actions often mean, that a dividend is paid or, on the contrary, everything is done not to pay the dividend. As I mentioned, unfortunately, money can be taken out of the company in different ways. Of course, it all depends on the management. There are stock companies listed on the capital markets that have very reasonable powers. Unfortunately, there are also some, that behave quite opposite. The future of dividends in companies is often unknown. Anticipating more or less unexpected adversities in the future, companies may not pay dividends, hoping that they will use undistributed profits in the future to protect the company. This is often true, but sometimes also an excuse. There is often no economic justification for paying dividends, they are inferior to the company’s policy.
It does not change the fact that companies, that pay dividends regularly are usually the most popular. It seems that 2020 will not be different.
I will be happy, if this post is useful for you or inspires you to take positive action. I have a request to like my Facebook page.
Below there are some my other posts, that I invite you to read: