WHY COMPANIES PAY DIVIDENDS

Why companies pay dividends

Table of Contents

Introduction3

Discussion (Main body)3

Conclusion8

Introduction

A business has an opening to yield its investors a dividend only after it has become money-making and can develop free cash flow. Free money flow is the allowance of money a business develops from minus its capital expenditures. Basically, free money flow is the allowance of money a business has left after it's made the essential investments back into its business. (Ross 2006 p. 23)

Free money flow devotes a business many of options. They have the option of utilizing this surplus money to either invest it back into their enterprise or yield it out as dividends. Sometimes businesses will be seeking to augment a new locality of their enterprise and they'll desire to plow their cash back into the enterprise because they believe they could get a powerful come back on their investments. Or occasionally businesses won't have new localities to invest in and they seem that by giving a bonus, their shareholders can profit from a better come back on that money than they can profit from for them. This is why you normally glimpse low-growth businesses giving high dividends. (Modigliani 2008 p. 261)

Discussion (Main body)

It's significant to note that just because a business is highly money-making; it doesn't signify it has the capability to yield out a large-scale dividend. Take dwelling Depot for example. During the 1990's, Home Depot had powerful snare earnings but they weren't developing much free money flow because they opted to use most of their functioning money to construct new shops and elaborate into new markets. (Miller 2005 p.69)

Some businesses flat out despise giving dividends. One demonstration is Microsoft. The business is seated on about $30 billion in money but hasn't discovered any apt modes to put it to use. Common considering is that they should yield a bigger bonus, but administration isn't too enthusiastic on that because of the levy consequences. When a business buys out a bonus, the shareholder has to yield levies on it. So the dividends often aren't the best way to put your money to use, except you have no other option left. We wish this assisted to response your question. Just remember: businesses with powerful free money flow normally yield dividends when they seem it's the best use of the cash. If there's a better opening out there, they'll reinvest it. (Merlyn 2009 p. 45)

Companies utilizing the residual bonus principle select to depend on internally developed equity to investment any new projects. As an outcome, bonus payments can arrive out of the residual or leftover equity only after all task capital obligations are met. (King 2006 p.65) These businesses generally try to sustain balance in their debt/equity ratios before producing any bonus distributions, which illustrates that they conclude on dividends only if there is sufficient cash left over after all functioning and expansion costs are met. The fluctuation of dividends conceived by the residual principle considerably compares with the certainty of the bonus steadiness ...