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.
FAQs
Companies that offer dividends provide investors with a regular income as the stock price moves up and down in the market. Companies that don't offer dividends are typically reinvesting revenues into the growth of the company itself, which can eventually lead to greater increases in share price and value for investors.
Why do some companies pay dividends and others don't? ›
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. Internal Revenue Service.
How does a company decide to pay dividends? ›
Dividends are typically issued quarterly but can also be disbursed monthly or annually. Distributions are announced in advance and determined by the company's board of directors. Companies pay dividends for a variety of reasons, most often to show their financial stability and to keep or attract investors.
Can a company pay a dividend to itself? ›
If your business is set up as a limited company, paying yourself dividends alongside a salary is usually the most tax efficient way to draw money out.
Why dont all companies issue a dividend to their stockholders? ›
They believe they can reinvest the money in the company to grow and strengthen the company. They're certainly aware that investors was a return on their investment. But the companies believe that the growth in value of the stock will give the investors a better return than simply sending the money back to investors.
Why doesn't Tesla pay dividends? ›
Does Tesla pay a dividend? Does it plan to? Tesla has never declared dividends on our common stock. We intend on retaining all future earnings to finance future growth and therefore, do not anticipate paying any cash dividends in the foreseeable future.
What are the disadvantages of dividend stocks? ›
The Risks to Dividends
Despite their storied histories, they cut their dividends. 9 In other words, dividends are not guaranteed and are subject to macroeconomic and company-specific risks. Another downside to dividend-paying stocks is that companies that pay dividends are not usually high-growth leaders.
Do I pay taxes on dividends? ›
Qualified dividends are taxed at 0%, 15% or 20% depending on taxable income and filing status. Nonqualified dividends are taxed as income at rates up to 37%. IRS form 1099-DIV helps taxpayers to accurately report dividend income.
Is dividend income taxable? ›
The DDT was eliminated by the Finance Act of 2020, and investors are now subject to dividend taxes under the traditional tax system. Therefore, regardless of the amount received at the applicable income tax slab rates, dividend income will now be taxable in the hands of taxpayers.
How do you make money if a company doesn't pay dividends? ›
Thus, investors who buy stocks that do not pay dividends prefer to see these companies reinvest their earnings to fund other projects. They hope these internal investments will yield higher returns via a rising stock price. Smaller companies are more likely to pursue these strategies.
For most people, it is not rational to time delay their share sale to capture a dividend. There are some minor tax consideration, but these will not be material for most people with relatively small shareholdings. Bottom line – if you want to sell your shares, sell them!
How long do you have to hold a stock to get dividends? ›
The ex-dividend date is the first day the stock trades without its dividend, thus ex-dividend. If you want to get the dividend payment, you need to own the stock by this day. That means you have to buy before the end of the day before the ex-dividend date to get the next dividend. In other words, it's the cut-off date.
Why doesn't Amazon pay dividends? ›
Why Doesn't Amazon Pay Dividends? Amazon is well-known for aggressively reinvesting its profits into the business. As such, it chooses not to pay dividends in order to be able to redirect its profits towards expanding into more sectors, as evidenced by its business history.
Why are some dividends qualified and others not? ›
A dividend is considered qualified if the shareholder has held a stock for more than 60 days in the 121-day period that began 60 days before the ex-dividend date. 2 The ex-dividend date is one market day before the dividend's record date.
Why would you invest in a company that doesn t pay dividends? ›
Thus, investors who buy stocks that do not pay dividends prefer to see these companies reinvest their earnings to fund other projects. They hope these internal investments will yield higher returns via a rising stock price. Smaller companies are more likely to pursue these strategies.
Why do some investors hate dividends? ›
But there is one big problem with funds that distribute dividends. What a dividend investor wants is a dividend that grows over time, and that's not usually the case with funds. They tend to adjust the dividend according to the evolution of net asset value-- the development of the market.
